Calculating ARV, Inventory Levels, and Comps
Houston, TX · Member since 2014 · 4 posts · 0 votes
Hello,
I am currently in my education phase, soon becoming a wholesaler. Can someone please clarify the following for me:
1. I see a lot of people explaining their calculation methods for ARV without inspecting the physical condition of the properties. How accurate can an arv analysis be without going out and seeing the home yourself or sending a trusted inspector?
2. How does one go about finding out what the inventory levels and sub-categories are in a target market? Do we get this information from Real estate agents, checking the mls, or by some other means.
3. Lastly, how does one learn to make the adjustments when doing comps for homes that are not exactly the same makeup? Is it something you learn over time from doing it, or is there training on that anywhere? I believe that is a crucial skill to master. (ex. 3br 2bt and a 5br 3 bt) Thanks! I look forward to reading the replies.
1. I personally prefer to walk through if it's possible. When you get into doing auctions, submitting multiple offers, or odd situations, it just might not be possible to inspect the property. In that case, you have to do as much due diligence as possible.
Without walking through the property and understanding how rehab works (so you know how much it's actually going to cost) it's going to be difficult to calculate an accurate ARV. I never like to estimate or use any "-ometers" - I want to see the numbers and the potential with my own eyes. On the surface level, you can compare the price of the home with others in the sub-division. For example, if you find a property that you're able to get under contract for $100K and after-rehab condition comparables have around $210K, the home most likely has some potential. Speculate based on the pictures that it needs about $40K of work (which you'll learn through experience), and you might have a good deal.
2. Inventory levels are a matter of opinion. When people ask me as an agent "how is the market" I usually say, "it depends" and find out what they actually want to know.
The best source for inventory is the MLS in my opinion. There are some websites I've come across the create visual representation of statistics by scraping MLS data that might be useful. I can't recall the names of any right now.
3. I wanted a solid answer to this question SO bad when I was getting my real estate license.
The fact of the matter is making adjustments is both a science AND an art. Even an appraisal is someones opinion based on information that is available to them.
Depending on how specific you want to be, you can roughly determine the value of particular upgrades such as countertops and a pool. I know a lot of people that simply use the 4 methods of central tendency: mean, median, mode, and range to come up with their numbers for price per sqft. and such. It's really easy to add/subtract bedrooms and garages once you've determined your price per sqft.
Here is a really good article on BP about making adjustments: http://www.biggerpockets.com/renewsblog/2013/09/08/determine-value-property-adjusting-values-comps/.
I hope this helps!
1. I personally prefer to walk through if it's possible. When you get into doing auctions, submitting multiple offers, or odd situations, it just might not be possible to inspect the property. In that case, you have to do as much due diligence as possible.
Without walking through the property and understanding how rehab works (so you know how much it's actually going to cost) it's going to be difficult to calculate an accurate ARV. I never like to estimate or use any "-ometers" - I want to see the numbers and the potential with my own eyes. On the surface level, you can compare the price of the home with others in the sub-division. For example, if you find a property that you're able to get under contract for $100K and after-rehab condition comparables have around $210K, the home most likely has some potential. Speculate based on the pictures that it needs about $40K of work (which you'll learn through experience), and you might have a good deal.
2. Inventory levels are a matter of opinion. When people ask me as an agent "how is the market" I usually say, "it depends" and find out what they actually want to know.
The best source for inventory is the MLS in my opinion. There are some websites I've come across the create visual representation of statistics by scraping MLS data that might be useful. I can't recall the names of any right now.
3. I wanted a solid answer to this question SO bad when I was getting my real estate license.
The fact of the matter is making adjustments is both a science AND an art. Even an appraisal is someones opinion based on information that is available to them.
Depending on how specific you want to be, you can roughly determine the value of particular upgrades such as countertops and a pool. I know a lot of people that simply use the 4 methods of central tendency: mean, median, mode, and range to come up with their numbers for price per sqft. and such. It's really easy to add/subtract bedrooms and garages once you've determined your price per sqft.
Here is a really good article on BP about making adjustments: http://www.biggerpockets.com/renewsblog/2013/09/08/determine-value-property-adjusting-values-comps/.
I hope this helps!
@Timothy F
Thanks for the information. The article is a good introduction. Now that I have a basis, I will search deeper.
#1 ARV is not tied to the current condition of the property. It is the value of a fully renovated similar property. So you don't need to calculate your repair costs prior to establishing an ARV. You just need good comps.
Hello Samori
Yeah, Paul has hit it right on the head. Trying to pinpoint the ARV of an older home would lead to inaccurate results. Using the average for the area, and adjusting for home size, lot size and amenities, and special attributes is the way. Age of the comps can be important, if the subject property is not going to be demoed or rebuilt.
Search sold properties within a mile or less of your "subject property."
Select the comps with the closest Sq ft of living space, beds and bathrooms, and lot size to your subject property.
If some of the comparables are within all the same location, but have an ocean or mountain view, then ask the people here or someone experienced and they may know. Properties located a block from a subject property that you are trying to buy, and that have these special attributes will be in higher demand, making them worth more.
You can try a web search and town records, if online to see how that town has valued the property, or ask someone here or an "experienced broker."
To change topics: How much is a Garage worth? I have it somewhere on my laptop here, but I am tired, so just do some web searches using keywords, such as "Improvement value of a garage in Texas, or Is it worth the cost to build a garage? Imagination and creativity with your searches will find it, but just ask everyone here first and then try the searches if you still are uncertain.
With all being equal between your newly found "Comps." Newer homes with newer amenities will be higher in price and I think the amenities and additions should bring the value up higher than a similar home that is 30 years older, due to age of the house and additions.
Ask experienced contractor's and broker's, if needed. They will know.
If you have the time, you can do comps with Microsoft Excel, or Access. I may have a spreadsheet for what you are trying to do with these comps, but it is late and I am ready to hit it.
Recommendation: If you can outsource finding your comparables and/or doing databases and spreadsheets, because they are time consuming and your time will be better spent on speaking with Seller's and getting the properties under contract.
Hope this helps.
@Paul Danieli brings up a good point @Samori Diallo and I hope I didn't confuse you there.
My point was simply that knowing your rehab costs earlier on in the process can save you time and energy. For example, you get the house under contract for $100K, you estimate the ARV based on after-rehab value comps at $210K, but you discover the house needs $90K in renovation. In that case, you most likely don't have a deal.
It was mentioned that newer homes with newer amenities will generally be higher in price. While that is certainly true in many cases, don't forget that location (ease of access to amenities, views, noise from traffic, construction or industrial parks, cleanliness/safety of the neighborhood, and overall situs for the area) is a big factor that influences value as well. In my area, I've found newer construction to actually be cheaper than some homes that have been heavily renovated that were built in the 1980's.
Thank you @Paul Danieli, @Ronald H, @Timothy F,
I see that the best thing to do is to learn to do the comps and adjustments properly. This seems to be a skill that you develop over time, but very important and less time consuming, rather than going out to properties and doing an analysis to determine arv. If you have any recommendations on books, video series, training courses on comps, etc... that helped you get better at doing it, please pass it along. I've been reading articles, but i think the best way to learn is just by doing it. Thanks for your input!