How to Determine potential ARV

Question

A house went for sale today in a really hot neighborhood. Asking price is $159,000 and the house immediately next door sold for $599,000 but a few other houses in the neighborhood sold for much less but still above $159K.

The house could definitely be rehabbed and improved both inside and the exterior

So, here’s my question:

Should I buy this house at $159K, rehab it, and hope it sells for around $599K?

I know you make money at the purchase, so the price is already high, but with the house next door selling for $599K there might be opportunity still.

Thoughts?

Bob Okenwa · Answer

I'd run a few more comps to get a more realistic number. I try to shy away from outliers when doing an comp analysis and look to see what the majority of homes sold for. Also, compare homes that are similar in terms of square footage, age, bed/bath count and so on. For instance, there are homes in my neighborhood that are directly next to one another that vary by over 2000 square feet. Gotta make sure you're comparing apples to apples as much as you can.

If the comps line up and you have good meat on the bone and have accounted for a little extra overage on the budget, then go for it.

Don Petrasek · Answer

@Pete Abilla don’t do “hope” investing, that’s the quickest way to lose money.  As Bob suggested, put together a reasonable number (at least 3 in addition to the house next door) and then compare them to the property that’s available.  Then assemble a good estimate of dollars you will need to spend on the renovation to get the house in a condition at least equal to the comparable sales.  Determine how long you will likely own the house and costs (taxes, utilities, etc).  This will all help you determine 1) your estimated profit. 2) risk.

The house next door could have sold under extenuating circumstances and if its way off the market an appraiser might not even use it as a comp.  Let me know if you need help with putting the numbers together.

Nick Gann · Answer

@Pete Abilla

As others have said you need comps. Unless there is some massive issue with the home, that 599k house is not the same kind of house as the 159k. When viewing comps you need to make sure your houses are comparable... meaning similar layouts and styles.

Ian Walsh · Answer

Thousands of comps and seeing what properties sold for in different conditions....

50 house rule.

How to Determine potential ARV

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