How do you ensure ARV in Cleveland small multi units?

Question

I am new to BRRRR and just made my first offer on a duplex in Cleveland. My goal is to do one BRRRR small multi-unit with each of my kids and grandkids (18 total). Two purposes - teach REI to them in real life situation and then split the cashflow and leave the equity to them as a legacy.

The one part I am most unsure about is the refi. To do what I want requires getting all my initial investment out of each property so I can do it again quickly. I have 18 to go and only enough seed money for 10 if I don't get all my investment back after refi. SO, everything depends on having a firm understanding of ARV.

Anybody experienced in the Cleveland market, please let me know the most reliable ways of knowing just what appraisers are up to and how to keep up to date with their practices.

Bob Prisco · Answer

@Kevin Miller simple answer BUY RIGHT ! You make your money when you buy . You really need to connect with someone that is doing deals and knows the market,,, DO NOT just go in blind and hire any contractor. You will get screwed, I am not speculating .

Good Luck

Account Closed · Answer

@Don Petrasek I'm interested to hear if the appraisal you had used both the income and sales comparison approach in the final reconciliation of value? I work for an appraisal company and although we develop the income approach on all multifamily appraisals, it is never give weight in the final appraised value and is considered unreliable for properties at or below 4 units.

Account Closed · Answer

@Kevin Miller 1st off, you sound like an awesome dad/grandpa! Those children will be blessed with this learning experience. Unfortunately it is hard to ensure ARV mainly because appraisals vary within a wide range of what the value could be, even up to 20% difference so its dependent on who you get. What you can do is study appraisals to understand how adjustments are made to comps to fit your subject and learn the criteria as well as be prepared for the appraiser with a list of i

mprovements you've made. The easiest way to explain how appraisers look for comps is to know that they need to "bracket" features such as GLA, bed/bath count, etc. Meaning, they should have a comp that presents the same as the subject or 1 higher and 1 lower. The location aspect will be the most difficult part, try to stay within a mile and you will also have to be familiar with more specific locational factors (for example, in a certain neighborhood maybe if you cross a main road housing prices decrease by $10/sq ft).

Ryan Clark · Answer

@Kevin Miller. When I am looking at small multi family units to assess value I look at average price per square foot on recent sales in area. For instance I was looking at a four unit where I live and researched to find out that $90 per square foot is about the going rate, however looking in a section of Little Rock I found that $75 per square foot is approximately the going rate. That may help you do rough estimate of ARV.

Kevin Miller · Answer

@Ola Dantis Thank you for the advice. I am doing just that. I made an offer yesterday for my first one that fits the criteria and the reason for my inquiry about ARV is the disparity in the comps for Duplexes in a 1-2 mile range from the property I am working on. There are 3-4 that meet the numbers I need to refi and recoup my initial investment, however, there are just as many that are lower than I need. There are some possible reasons (finishes and such) but as I am new to buying in the area (Shaker Heights) I was hoping for some specific ways to ensure the higher appraisals.

Ola Dantis · Answer

@Kevin Miller

Welcome to BP, Kevin.

First, I think what you should focus is really understanding the BRRRR process well enough because if you are trying to teach the kids and grandkids, it will be a good idea for you to grasp the concepts very well. I think BP has a book on it.

Also, I think you should not worry too much about all the 18 multi-unit, start with ONE.

That ONE will be an amazing case study for you in order to propel you to your final 18 number.

Michael Forbes · Answer

Keep track of your improvement costs. Make sure the appraiser understands the value that you added.

Also explain the circumstances of the low purchase price at which you bought (i.e. not an arm's length transaction, needed help out of tax trouble, cash/no contingencies offer, etc). This will help justify the recent low purchase price.

Don Petrasek · Answer

Account Closed yes I've seen the income approach used and seemingly given some weight even on a single family (which did surprise me) but I get your point that the sales comparison approach can be more reliable especially in cities like Lakewood where you may not be able to justify a high end two family sales price based on the income approach, but can certainly find comparable sales to support it.

Account Closed · Answer

@Don Petrasek interesting! Thanks for sharing. I like seeing what other appraisers do aside from the hundreds of appraisals I see from the same few appraisers I work for lol.

Don Petrasek · Answer

@Kevin Miller appraisal methods are consistent and there’s really not much for the average investor to keep up to date with.  For a two family, the appraiser is likely going to rely on a combination of the income method and comparable sales method to determine the ARV.  For the income method, the appraiser will look for units comparable to yours that have recently been rented and then use those to determine net operating income (what’s left after paying all expenses).  Then the appraiser will then determine what rate of return an investor expects and backs into the value.  For the comparable sales approach, the appraiser will choose properties like yours and make adjustments for features to determine value.  Lean towards using the income approach, it will be more conservative especially in higher grade neighborhoods.

I’ve had one situation lately where an appraiser was being overly conservative (used a bank repo as a comparable sale for a property that was updated and occupied) but other than that have had no problem with getting the value that buyer and seller agreed to.

How do you ensure ARV in Cleveland small multi units?

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