Comps and ARV?

Question

How do I learn how to become good at comps and/or ARVs? I have been told over and over how REIs make (or loose) money at the time of purchase. I am unsure how to become good at this, find more information, and how to practice.

I am still fairly new, but I have taken my first steps at becoming a part time investor. I have parameters for a mailing list, and the start to a buyers list (currently 2 but they are people that I know).

I have also taken the time to set up an appointment with several lenders in my area so I will know what my potential buying power is on day one. I feel like I have a good grasp of how the process will flow, I can see the ins and outs, the beginning middle and end, but the one thing the seems like could totally make or break a deal is the one thing that I know the least about. How to identify a good deal from a bad one.

Any and all advice is appreciated.

Robert Leonard · Answer

@Wane Tango Welcome to BP!  You are wise to be hesitant at this point, because IMO, you will only be ready for your first investment of any kind in REI when you understand valuation.  Congratulations for recognizing the importance of that!

Don't underestimate the value of free!

People in retail RE pay tons of money to market properties and most of that information is available for free in the form of realtor websites, magazines, newspaper sections and rental publications.  Check out the sites, pick up the publications and study them.  You will begin to know the retail values of properties by the areas and subdivisions.  Sooner or later, you'll notice when a price is higher or lower than "normal" for a location.  That's when you know your market.

The more you know your market, you will learn the boundaries of where values change from location to location - that's very important to know.  A "comp" might be on the other side of a fence from a property and not as good of a comp that's two streets away.

One technique:  If you use a smart phone, download the realtor.com app  Use the "search nearby" and click on "scout" at the bottom.  I have a dash mount that holds my iphone.  While you drive around you can see the prices on listed properties as your are driving down the street.  When you see drastic differences in prices, look for what changed.  What is it that is the boundaries where values change in this location?

However you do it, make sure you have a firm grasp on valuation BEFORE you invest.

Wane Tango · Answer

@Mike Parks Now this is not a subject that I am strong in (or really anything) but I would be happy to pay forward what I have picked up from others.

From the outside looking in ARV and comps for buy and hold will be the exact same as doing it for a wholesale or flip as long as it is a 4 plex or less. Banks will lend on 4plexs or less as if they are a single family home  so just look for comps with similar SF and bed/baths that should get you in the ball park. So everything that @Bryan L. mentioned above should apply to you ask well. Anything over a 4plex is looked at strictly on annual income. If you want to see if a rental makes sense you need to look and see if it cash flows more than anything. The rental calc on here is really good at making you look at most (if not all) the things you need to know about a single property to see if it is a deal you would be comfortable with or not. One thing that Brandon Turner keeps mentioning in the podcasts is that you should plan up front for outside property management even if that is not part of your plan. It gives you a pad later if you decide to step out of the day to day management or if you scale to the point to where you can no longer manage yourself. Im not an expert and I have no real world experience in this I am just repeating what others that are way smarter than I am have told me. If I have said something that is wrong, please anyone that knows better correct me.

Bryan L. · Answer

@Wane Tango I keep thinking of more stuff related to this topic (be sure that you read the other posts above too).

Here's something else to consider.  Your listing price and the final number that you get out of a deal are two separate things.  The process that I described above is a good process to set a listing price.  But realize that most houses in our area actually sell for 95-98% of list price.  And most first-time home buyers will also need for you to pay 4-6% of the sales price in their closing costs assistance.  AND, you may need to do a price drop (or two) to get them to sell quickly.  Most of this is covered by the standard formula (70% of ARV - repairs), but that closing costs thing really needs to be added into that formula.

Also, the tax appraisals can some times give you a good ball-park number.  They tend to run high in dekalb and warren counties though and a little low in white county.

Mike Parks · Answer

I am curious to see what info comes of this thread as well. I dont want to thread jack but have similar interests in knowing.

What do you do if you are mainly a buy and hold investor and most of the properties you buy are in renters neighborhoods. If retail  comps arent really there, but wholesale comps are then where do you get your ARV numbers from?  I do a lot of cash out refi's and recently had a property go way south on the appraisal that was done.

If comps are low due to wholesale numbers, then where does your arv come in to play?

Bryan L. · Answer

@Wane Tango You need to be very careful using those free sites.  There's some useful info on them, but there's also some trash.  Even with MLS and direct court-house info, you have to weed through it a bit.  For example, I use a system called CRS which is included with my MLS.  When I run a comp analysis using this system, it pulls info directly from the court-house records.  And it will set up a nice little bar-chart histogram for me.  I then look at that histogram for things that look out-of-line.  For example, it may give me 8 comps, and 7 of them may be in the range of 80K-90K.  And one of them may be 30K.  What the what?  Obviously, something is different about that 30K sale.  Should I include that sale in the calculation of the average?  Probably not.

Also, you will get the feel of it after you have looked at more houses.  For example, I heavily target houses in one particular county that were built in the 1970s and 1980s, with about 1100 - 1400 square feet.  I've seen enough of these (and bought enough of these) to know that they typically retail in the 70k - 80k range.  Overall, in our area, a good guestimate starting point will be 70-75 $/ft^2 for houses built in the 70s or 80s.  Once you get into those built in the 90s or newer, you may get into 75-80 $/ft^2 for houses with vinyl siding, and maybe a little more for brick houses.  Newer brick houses with all the bells and whistles will be getting up there to $100 per square foot.

Anyway, I can show you some time if we can meet at my office or for lunch or for a beer.

Dina Miller · Answer

Hi @Robert Leonard, do you knwo fi the realtor.com app still has the scout feature? I can't find it but want to make sure I'm not just missing it as it sounds like an incredibly helpful tool. Thanks!

Richard Sanderson · Answer

Real estate investors in a local real estate markets should develop a trusting relationship over time with at least three individuals that represent:

1. The real estate appraisal profession. Many local appraisers specialize these days and can discuss comparable sales for residential, multifamily, or even green residential properties. Appraisers are busy but they are also interested in the investor's prospective, so don't under-estimate the value you are bringing to the relationship.

2. The local real estate assessment office. During my 30-plus years as a city assessor I noticed that the really savvy investors and real estate developers all had active relationships with the assessment office. They typically reached out to me or my staff four or five times a year and subscribed to monthly or quarterly sales reports that were developed after sales information gathered from the county recording office was collected, analyzed, and verified.

3. The local real estate sales community. Real estate agents and brokers have some of the same incentives as appraisers, but agents are better informed of the current market. Appraiser generally focus more on sale in the last 60 to 90 days. Most agents will be helpful even though they know you'll not be listing to sell with them right away, in anticipation of the need for their services when you do decide to sell OR by referring potential clients to them because they are so helpful.

Wane Tango · Answer

@Mike Parks When you get a copy of the appraisal then you will get a clearer picture of why it was priced that way. Also you can contest an appraisal if you feel like it is off by more than 10K. Then again their may be something more going on in that property than you are aware of. Make sure to follow up with this as soon and as detailed as you. Especially make sure that you get a trusted inspector in there before you go into closing and walk the property with him. If there is any concerns make sure to get 3 bids from contractors for repairs. The truth will come out somewhere along the lines, you just don't want it to be a surprise after you take control of the property. BTW if this is a buy and hold property for you, and it appraised that low. It would be worth while to have it tax appraised again. That could make a couple hundred dollar difference at the end of the year if they follow suit with the appraiser.

Good luck with this and make sure to keep me posted about this, I am curious to know what is going on at this property.

Mike Parks · Answer

Well I made a post about this separately but hasn't gotten much attention. I recently purchased a 3/1 in the Philadelphia area. I paid 18.5 for it and the seller (who is also an investor) stated that once repairs are made (very minor) arv should be ~75k. I had my realtor pull comps and there were no recent sales (within say 6 months ) that were retail but there were some 12-24 months old that were from 65k -95k and specifically one 3 doors up from mine that sold for 75k 12 months ago. It was a good buy and hold and cash out refi scenario for me.

My bank approved me for a 55k LOC against property pending appraisal. Now while the house wasnt 100% done, it was liveable. What I mean is that it needed some paint, a closet door or two, and some ceiling lights installed.

Appraisal came back at 30k which was right on target with all the wholesale sales numbers in the area. I have 2 properties that I refi'd 5 months ago in a crappier section of the city, houses much smaller and 0.7 miles away and they apprised for 64k and 67k.

I havent received copy of appraisal yet but the math doesn't make sense. Tax assessment alone is over 50k.

Wane Tango · Answer

@Bryan L. Now that make perfect sense.

Comps and ARV?

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