How to get the best ARV estimate possible??

[Daniel O.]

As many investors have said, the profit from a flip really comes from the front end of the deal. I have done some research and will probably use a Hard money lender. The group im looking at will lend up to 60%-65% of the ARV. With that being said i will have to come up with a good way to estimate the ARV of a home. If i do this right I may be able to even use a little bit of that money to renovate certain things in that home. Does any one have any suggestions on how to estimate an ARV??

[Dion DePaoli]

The ARV or retail value of a home is the retail value of other similar homes close to the subject property both. It is not, its own stand alone concept separate from retail price. When you look at a property you will be seeking a discount from the retail value of the home in order to bring the home current in the market place and thus makes it capable for the home to capture a higher percent of the retail value in the normal marketing time.

I like this analogy, where retail value is a glass of water. Improvements made to the property do not increase the size of the glass, they allow you to drink more of the water. In this concept it is possible to "over build" and home.

Just because you buy a home for $100 and put $10 of improvements in doesn't mean you have a $110 home. If similar homes are also worth $100 and are modern or up to market then you will need a discount from the $100 sufficient for you to put the $10 of improvements in and make a profit. So you would need to purchase the home at $85 so you can put in $10 of improvements and make $5 profit.

Work backwards from retail and you will find your numbers. After repaired value is a concept that delineates that repairs are needed to capture a higher percent of the retail price range sometimes decreasing marketing time as well. The price you pay for the home prior to improvements would be considered an As Is price. For instance if a home needs a new roof because it has a hole in it and the roof costs $10 and other similar homes with complete roofs have sold for $100 and you wish to make a $5 profit, then you need to purchase the home at $85.

We know the return on investment is what is left over after all costs and improvements. In simple math it is sometimes hard to drill into the return as it moves a little bit. So in the example you make 5% return. If you wanted a 20% return and you discounted the purchase price to $70 ($10 repairs, $20 profit) you will actually realize a 25% return since your investment is not $100 it is $80. So when you discount from retail all costs including purchase price, closing costs (both buy and sell) and improvement costs your margin is what is left. If that margin is equal to or greater than your desired return you're in the right place. If not you will need to increase the discount to account for your profit margin target.

Whether you achieve your target return or profit is a function of your management. There are some more complex mathematical ways to calculate backwards such as using a Net Present Value calculation but if this is all new, stick with the easy math first.