Finding confidence in my ARVs

[Garrett Gahn]

Hey BP,

As I continue to practice analyzing BRRRR deals, I'm finding that I feel great at every stage except truly feeling confident with my ARVs!

Although I run my comps, research recent home sales, etc.. I feel as though the comparable properties in the market I am investing in ( a very beautiful but also very rual area of the midwest) are almost all outdated when it comes to layout and design. When I look at my rehab estimates, I always favor much more modern design details than what is seen in the area. 

Am I seeing an opportunity to breathe a little life into the real estate market or should I be weary of just how well an "aesthetically pleasing" property will perform when estimating the ARV?

Hope I'm making some kind of sense.. thanks for any advice! 

[Jim K.]

@Garrett Gahn

Well, you've got something that a lot of people starting in this business don't have: the honesty to admit that getting to a realistic ARV is not easy.

There is very much a giant pool of thick swirling BS around the concept of ARV in real estate investing. Understanding what makes a property sell at one price point versus another is never perfectly accurate. This is not The Price Is Right, where you guess at something that actually exists like a MSRP. There are simply too many variables, and ultimately, the closing prices of residential real estate are often based more on emotion than anything else.

The flip shows, the gurus, always dance around this. I remember once on a flip show I was watching, the hosts figured out the ARV of their target property by bicycling around the neighborhood and chatting on their cell phones, staying hydrated sipping coconut water out of their trendy sports bottles. No, that's not how it's ever worked for me. It's my butt in a chair in front of my computer, leaning into my monitor with my spreading gut pressed up against my desk, going through public records to find the prices that similar places nearby actually sold for, looking at pictures of these places wherever I can find them, utilizing my understanding of the neighborhoods I know in my target area.

The right place for me to start from was to shoot for is a range. Ask yourself, what's the lowest price this property with these projected modifications could sell for? Then ask yourself, what's the highest price? Once you have those two numbers, subtract, and 1/4 of the difference (25%) added to the lowest price is your conservative ARV. 1/2 (50%) of the difference added to the lower number is your aspirational ARV.

Real estate is very regional, but I suggest you go on YouTube and take a look at some of the videos that @James Wise of Holton-Wise in Cleveland has put up on "Running the Numbers" and "MLS Search & Analysis." These videos are far and away the most accurate, real-world portrayal of the grinding analytical process of what figuring out what a property is worth and what it could be worth that I've found in this business.