Figuring out a subject property's ARV

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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Figuring out a subject property's ARV

Noah Garza
New to Real Estate · Matteson, IL · Member since 2020 · 15 posts · 2 votes

I have a question regarding finding out or best estimating a property's ARV. After reading many posts and watching some videos it seems I get the same answer. Best way to get an agent to find the best comps and take the average of the closes three, or use some online realtor site and get comps from there. I understand the process of finding properties that best match your subject properties attributes such as Sq. footage, bed and bathrooms, garage space and other amenities but the problem I'm facing is that in the neighborhood I want to invest in I can't find any SFH that have been sold recently that have been renovated like I want to do. The neighboring houses are in good condition. I am gonna do a whole house remodel new paint, refinish the wood floors, and really focus on the kitchen and bathrooms. It already has a newer roof, electric and HVAC system. Realistically how much value will I get out of making these renovations? What is the cost vs return value on a remodel? I know there is a point where there will be diminishing returns but every rental property I buy want it to be as if I was gonna live there, is that unrealistic? I am not asking cause I want to flip right away I want to buy and hold and then implement the BRRRR strategy and want to get the best possible ARV. Sorry for the long winded question but any feedback will be appreciated.

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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    6y

    @Noah Garza this is one of the most CRITICAL topics to understand. Especially early in an investor's career when we maybe don't have as much money as someone who is very experienced. Forecasting ARV is SUPER important. But also so is renovating a property according to the neighborhood....meaning, not OVER rehabbing the property when the neighborhood doesn't support it.  You don't want to own the nicest property.  You want to own a good property that will sell (if you are flipping).  Let's talk about a couple of concepts real quick:

    Appraisal Value when no Comps Available - the best example I can think of for this is "Lake Front" property. Usually when someone owns a home on a very desirable lake, they never sell. And when one does come up....no "lake front" properties have sold in forever. So how do you comp a Lake Front property when there aren't Lake Front properties that have sold? And this is the trap - you cannot. At least, not reliably. Lets assume we have purchased a property like this, renovated it, and are selling it to a normal, average purchasing buyer. That "normal, average" person will likely be receiving a "normal, average" loan - like a Fannie Mae or Freddie Mac type of loan (I'll even extend this to VA and FHA too). The appraisers in this scenario will go to the home, see that it's a good home, measure the square footage, count the bedrooms and baths.....and find OTHER comparable properties (comps).  But here's the catch....none of them will be Lake Front property since no one sells their lake front property.  There's no comps!  The appraiser has to find OTHER properties that are similar to ours....but none will be Lake Front.  Then the appraiser has to make an educated guess at what the value of the view is.  And that is where the element is that is outside of our control.  Now our deal is completely reliant on another person's opinion.  And that's why most investors don't choose to purchase these types of properties.  Your deal is now not up to you...it's up to someone else.  They are now controlling your profit.  Yikes!  So if we cannot find comps that are like our property we either need to make an even MORE aggressive offer to account for this...or just skip the deal entirely.  This same type of philosophy applies to you adding a pool....when no other homes have pools.  Or enclosing a garage to gain square footage.....when no other properties have enclosed garages.  And you can apply this to just about anything; granite counter tops, odd layouts, bedroom and bath counts, etc.  We want to target properties that we know will be supportive by comps....or just make a significantly lower offer.

    Value of Rehab - this is also a critically important concept to understand.  You can certainly google something like "best renovation values" or something to that effect and find plenty of articles on what brings the best "value".  But nothing, and I mean nothing will give you a $1 for $1 exchange.  EVERYTHING will be LESS than $1 for every $1 improvement you make.  And we know this, which is why we have to offer so aggressively on properties.  The two biggest "mistakes" I see new investors make is on the roof and windows.  Someone will say "well, we put on a new roof".....but every comparable property already had a roof.  And same with windows.  All the properties that have sold had windows.  So if you have to replace things like that - you gain $0 in recoupment value.  So if windows or a roof does need to be replaced, then you need to make an account for that in your offer.  

    *WHEW*  I know that was a lot and as you can see I barely answered your questions.  This topic is so involved and has so many elements to it that you will need to get really good at this. Better than anyone else, I might say, if you want to be a successful investor.  And sometimes the only way to learn it well...is by doing it.  Keep searching for information and getting better at it.  On my first deal, I purchased a home for $7,000.  That way, if I made mistakes, they would be smaller mistakes.  To this day I add a 10% buffer to my bid in case there was something I couldn't see or take into consideration.  Keep that in mind as you make your decision. Thanks!

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  • Noah Garza
    OP
    New to Real Estate · Matteson, IL · Member since 2020 · 15 posts · 2 votes
    6y

    @Andrew Postell thank you for the feed back, that is a great point about not trying to have the nicest property. I guess in the end its all subjective, I've read different articles and all have different numbers as far as returns go. Some state a kitchen remodel you can expect between 57 to 70 percent return on its cost. I guess in the end if I'm $5,000 to $10,000 off on my expected ARV it wont be a total lost since I'm buying and holding and then refinancing. I just will be leaving more capital in the deal, now if I was trying to flip then that would be a different story. Thanks for the quick response!

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