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Updated almost 6 years ago, 01/16/2019
How to determine ARV and rehab value
Hey All! So I have very little background in construction or house repair. I also just bought my first duplex, but am new to the game. So here are two questions that have been bothering me and are making me feel timid about buying property that needs repair.
1. How would someone like me, with no repair experience, go about assessing how much it would cost to repair a place.
2. Once I have the value from number one, how then do I assess what the value after the repair would be?
Basically I'm looking at trying to get the two fundamental inputs to the 70% "rule". I'm sure some people will say to contact a contractor and a real estate agent. That's good to hear, but is there anything I can do myself? Does anybody have any good resources to educate myself on the cost of rehabbing houses?
And I'm also in the Denver area, so if anybody has any suggestions for a good real estate agent knowledgeable in real estate investment and suggestions for a good contractor I'm all ears! As always, thanks.
Colin
Start with a bathroom. Measure the floor, walls, etc. Figure how much tile, backerboard, mortar & grout you need. Then look at tub, toilet, vanity, since, hose connections, etc. Measure your walls, floors, etc. Find the sqftage for paint and flooring. Look at light fixtures etc. Keep a spreadsheet to track everything. Then look at home depot.com and start adding things to your cart. Do this with a kitchen too so you can get an idea for material costs.
What kind of contractor do you need? A GC type to handle everything or maybe a handyman for the lite stuff?
As far as another real estate agent, why aren't you going with the guy/gal that sold you your home?
To find the ARV of your home, just pull the rehabbed comps in your area.
BP has two great books (I'm the author, so perhaps I'm biased :) ) that delves into gory detail on how to estimate and how to analyze deals:
Lol, I was just about to write "Buy J Scott's 2 awesome books"... So, um, yeah...
Hey Colin,
Estimating fix up costs and ARV are difficult to get right when you are first starting out, because you have no experience and you will all most always estimate cost low and ARV to high. My recommendation would be to first figure out the type of rehabs you want to do (i.e lipstick, full scale remodels, pop tops, etc.), and then pick the individual markets around Denver where sales prices support this level of rehab, including the purchase price and holding costs of course. Once you know what type of finished product you want to put your name on, it will be much easier to price out materials and labor for the level of rehab you have in mind (e.g. there is a big difference between subzero/Wolf appliances, and GE Monogram...). Then work with an investor or an agent who can look at properties in those areas and let you know how many beds/baths you should have, whether or not you should finish the basement, add square footage, etc. These things can dramatically affect your rehab costs. Then I would get bids from GC's and individual contractors for each discipline to do the work required, that way you can decide later on if you want to GC the project yourself or not. Put all those numbers together to Beth your total rehab cost, and run it by a couple of investors (or the bigger pockets community) for a sanity check. The feedback of a good mentor familiar with the area should calm those fears quite a bit. If you still don't feel comfortable to go do a deal on your own right out of the gate, then it is always possible to joint venture with another investor in order to hedge your risk for your first couple deals until you get the hang of it.
Estimating ARV simply comes from experience and market familiarity. I would get as many opinions as you can, and implement a conservative strategy on pricing your rehabs so you have a little extra wiggle room when things don't go as planned...
We have our own brokerage in order to make life a little easier setting up showings, doing research, running comps, saving on commissions, etc. Happy to give you a second opinion on comps or ARV in the old Denver markets that we are familiar with (i.e wash park, highlands, sunny side, congress park, etc.), just let me know.
I'm a big fan of @J Scott 's book on estimating rehab costs as a good primer prior to dealing with contractors.
As far as the ARV, normally you wouldn't directly calculate what a rehab item is going to contribute to value, you would instead look at comparable properties that have that feature, and use a comparative analysis of recently sold properties to determine that value.
Awesome info everybody, thank you so much. I really like the use of Home Depot to ball park the cost and then I can run it by a couple folks here to see if I'm anywhere near correct. So it sounds like a good moving forward plan is...
1. Read up on the recommended books to absorb as much of that as possible.
2.Find some property and contractors to do the work (or a GC) and just go head first in on it.
3.Run estimates by investors/bigger pockets community to verify.
As for the ARV I have a follow up question. There was mention of using comps to provide this info. I'm familiar with going through Zillow/red fin/ county websites to get sold prices for houses, but how do I know if it was rehabbed and if it was how do I know what the level of rehab is compared to my property?
Once again, thank you all.
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@Colin Carr you should be able to tell if it was rehabbed. Look through about 50 recently sold homes. A rehabbed home will be very neutral, all new appliances and flooring ect, likely nice but no huge frills. By the end of the 50 you'll likely be able to spot a flipped property from a mile away. There tends to be "standards" in terms of flooring, cabinets, color schemes.
The level of rehab doesn't matter. Just has to be the same condition after it. You may need to do 30k of work to get it to that point and they maybe needed to do $10k. No difference. It's the end point that needs to be comparable. Just try to find similar size, bed bath, within a couple miles.
A realtor can help with comps too if there's one you recently worked with to get your duplex.
Originally posted by @Colin Carr:
There was mention of using comps to provide this info. I'm familiar with going through Zillow/red fin/ county websites to get sold prices for houses, but how do I know if it was rehabbed and if it was how do I know what the level of rehab is compared to my property?
You hire a Realtor to do this for you. Have him/her take you into rehabbed homes that are for sale or under contract. It will help you get an idea of the level of finish, etc.
Welcome to the site- you've gotten great advice so far. I think the book are a good source of information and I'd recommend reading them as well. You mentioned that you just purchased a duplex ; does it need any small repair or addition items done to it? If it does, maybe you could try estimating those small jobs, acquiring quotes and executing the contracts with those. Ask around with friends and family and see if they are getting ready for an addition or repairs and ask if you can try estimating it for practice before they start any demo work.
Just some thoughts... cheers!
@Colin Carr I look at the pictures in the ads. If you don't have pictures like with the county being the source of solds. You can look at the chain of title. If a property sold 8 months ago for $250,000 and then again last month for $350,000 you can pretty much bet it was a flip and was fixed up at the $350,000. If you can see the descriptions that the real estate agents then they often brag about it being remodeled.
Some pictures I have pulled up on Zillow do not match the asking price. I have seen some 3/1 in the same zip code for 100K, and another clearly remodeled home for 65K. Is it possible they uploaded renovated pics after it was sold?
You don't need construction background to estimate rehabs and you don't need to know how to swing the hammer to manage them, (though both do help if you do) you only need to know how much it costs to swing the hammer and how long it should take.
One suggestion was to get pricing on tile and tubs, and toilets, and vanities, etc and that is true, but you need only do it once. Once you know these basic average costs, you should fill in a checklist sheet (I created one and shared it here on BP 6 years ago in the file place found here: https://www.biggerpockets.com/files/user/BarnardIN...
Once you have done this, it is best (in my opinion) to break up the home into sections. Kitchen, bathroom, flooring, paint, interior doors, windows, base and case, exterior doors and glass sliders, exterior siding or stucco, landscape, electrical (rough and finish), plumbing (rough and finish), roof, HVAC, and misc. Then you refer to your checklist and add up what it costs for each section on average. So let's say your area calls for the average kitchen cost of $8k, a bathroom gut and remodel is $4k, flooring is $6 per sq ft, paint in and out is $7k, etc, etc. You then start going to listings needing repairs and practice identifying what each needs. Then go back and add up each section to arrive at yourvtotal costs. For standard easy run of the mill properties, you should quickly gain the experience via practice of walking in and out of a property and adding it up in your head. This will get you close and you should start out adding 10% to your total to arrive at your final number.
I can spend 10 minutes in a house and by the time I hit the front door, I know it needed a kitchen, 3 baths, flooring, paint, electrical, plumbing, landscaping, doors, windows, etc and my total comes to $60k. Obviously it takes time to get that good and be accurate, but if you can get close, your actual contractor will get you all the way and you will at minimum have a number close enough to make a decent evaluation on rehab which is one of the two numbers you need to make your purchase offer.
Comps is another item that takes time to gain experience. It is also a combination of science AND art. The math behind it is mire simple, the art is the part that takes the most time to learn. Just picking any agent to assist you is not the best choice, they may have self interests in getting the commission at purchase and/or the at exit which they could overpromise the ARV and under deliver. You need an agent with at least 15 years experience whom you can trust. I say that because this agent would have been through multiple real state cycles which is of great importance. I have always come up with my own comps and thereby my own exit value. I then ask my trusted agent to do the same (not sharing my number with them) and if their number comes back same as mine, I know I nailed it, if mine is higher or lower, I then compare notes and see what each of us were considering and redo our numbers together to arrive at the correct one.
Okay, so I'm ready to take the jump... or am I? While still stuck in my own way and contemplating my next move; my first opportunity may have just landed right in my lap.
I'm suddenly being forced to react, instead of watching from the side lines for a change.
A neighbor phoned me out of the blue and said, "I'm not sure what to do... I'm dying over here".
She lost her hubby 10 years ago in a car accident and she was almost paralyzed in the same accident. She raised her daughter alone, daughter graduated, and has moved on.
Hubby was DOD, she was left with the home, and has been injured again in a second accident. She is currently awaiting a settlement and wants out of the home NOW. Just found out the settlement will be less than her doctor bills. Home is paid up.
The home is in a fantastic area (military bases), great neighborhood, built in 1994, 3bd 2 bth, 2680 sq ft, Comps are 256,000 - 261,000, assessed 236,837... I'm suddenly blank...
I want to help her first and foremost. She wants to move to a 1 bedroom or even a studio, she totally wants cash now, and she has spoke with others who have all said she is unrealistic of her asking price...
At the end of the day I want to flip and then flip and hold... Her property would make an awesome rental... for the right price...
I'm wondering do I attempt to approach her with the idea of assuming the loan after doing the numbers with a cash payout on the side? or... take the role as a wholesaler to get home under contract for a buyer? I'm now a floundering fish out of water at the foot of four year old... Somebody slap me, than offer suggestions... I was so confident with the calculators before... The gate has open, and I'm still standing here... like a deer in headlights...LOL!
If you truly want to help her, then get her home on the market(MLS with a Realtor) so she can get the highest price. She really needs the help of an attorney that can get those medical bills down. If you want to help yourself, then your offer needs to be in the low to mid 100s if it really needs all that work. I might be a buyer if you want to wholesale it.