How much should I discount my ARV for a house no garage??

Question

So I bought another flip in Dallas for about $270k. Top of market ARV is $425k?  The garage was converted and the driveway now is a very nice pool. There is a carport in the back alley and a circular driveway in the front of the house. There is no way to turn the carport into garage because of easement permit issues. I know I'm limiting my buyers but how much do you think it will be discounted from top dollar $425,000 ???

Brian Pellerin · Answer

A $400K house in Dallas should have a garage and as you know, this is an expensive house for the area which usually means the homeowner has nice cars that feel better in a garage.  Sometimes, it gets a bit warm here.  Most rehabbers that I know will convert the garage back in a heartbeat.   However, the challenge that many garage conversions have is whether or not the captured space is functional and flows well with the house.   Space that doesn't feel right, IMO, is not valued by the buyers, even though it is there on paper.   Most garage conversions that I've seen don't flow properly, even when they are expertly constructed.

Because garages are expected here, we typically value garage conversions as contributing $0/sqft (which is a big hit to your ARV) and in some cases, go more negative than that.    And budget $$ the rehab to correct the problem.   You get a double-whammy hit because you may have overpaid for that space in the first place, if you gave the seller credit for this "bonus" space in your offer price.

As I'm scanning the MLS for deals, we always pull up garage conversions because the standout as underpriced for the neighborhood.   Then once we figure out what it is, and recalculate its value, its no longer a deal.  Here's the interesting part.   We'll pull up that same house multiple times over because they appear to sit on the market much longer (many months), again, IMO because the homeowners have over-valued this extra space.

Having said that, I was in a house this week, which was a 2/1 with a single car garage.   I got there and found a 3/1 with a 2 car detached garage.  Since detached garage seemed to work and the space captured was functional, I think it actually added value to this house.   But, in this case, it was a low priced house ($65K ARV) that went from 1000 sqft to 1200 sqft.   So, I gave it almost (due to detached) full value and estimated $75K ARV.

A few weeks back, I bypassed an incompetent realtor and found a homeowner with a 4200 sqft house that wasn't selling.  From the pictures, I could tell why it was on MLS for > 1 year.   After previewing the house, I explained that his wonderful 1200 sqft addition, which included a recording studio, was actually adding negative value to his house because the space wasn't functional and it was eating up too much of the yard.   His price/sqft was a bargain for the neighborhood, only if you included all of the space.   A bargain? but, no takers.   We talked for a while and I was sure that I was going to close the deal, as I gave him honest, thoughtful feedback that his realtor never mentioned, only to find a huge reverse mortgage.   He made out like a bandit on that reverse mortgage as they mistakenly over-valued his square footage and paid him handsomely.

I recommend putting the garage back in, (unless carports are standard in this neighborhood).   Good luck!

John Berg · Answer

Great feedback. I'm discounting it by 25,000 or to 400,000.  The carport will provide some shelter against hail and it is about 20 feet from the house

Tom Goans · Answer

This is a local question. It is primarily based upon what the target market desires and will accept. It is also what is commonly found in the neighborhood.

Is your property one of the few without a garage?

When I think of the Metroplex, I think of Hot and Hail.

Your top dollar estimate may not be a good comparable. A property is only worth what someone is willing to pay for it.

Ryan H · Answer

It depends on a few other bits on info like the number of bedrooms, other storage space(s), distance of carport from the main house, and size of garage for the area (1,2,or 3 car) but assuming you are discounting a 2 car garage, I would take off around $20K - $30K based on the cost of what a new garage costs plus a little bit more being that the lot has easement issues that won't allow for a garage in the future.

The key words in your post are "I bought." How much did you value the ARV to make the deal work to start with?