How does ARV work?

Question

I know when wholesaling a house that needs work done, you need to know what repairs need to be done, the cost of the project, & what the ARV will be. From there you can also calculate your MAO off of the ARV. But my question is this: how is ARV calculated?

I always thought that if a home per se is WORTH 100K, & you put in 25K of work/upgrades, that the home value goes up to 125K (100K worth + 25K repairs). Is this right? And if not, what is the best way to calculate ARV after estimating repairs & costs? Do you get an appraiser to appraise the house, then take into account estimated repair costs? In need of some clarification. Thanks

Devin Beverage · Answer

Hi, Eseta! I"m currently learning about ARV and rehab costs as well.

You might think that if you put $5,000 into a bathroom, you'll only get $5,000 out, but if you do it right this isn't the case. Here's the thing: Buyers are lazy, in almost any industry. People that want to get in a house and do nothing but live in it are usually willing to pay a premium for a turn-key, tight-sealed, and packaged home. This is why $5,000 (and any time and stress involved in the renovation) put in yields higher resale value.

A few places I have found for getting good at estimating rehab costs are simply calling local contractors and sending pictures of what needs to be done;

Looking around through Biggerpockets and other places online to find (rare) full rundowns of before-and-after's including costs, sometimes all within a spreadsheet with photos. The closest example of this one I have for you is J. Scott's teardown/new-build which includes the costs for everything.This isn't a rehab, but it's a perfect example of the itemization of specific jobs within the project and costs.

https://www.biggerpockets.com/forums/522/topics/90...

Speaking of J. Scott, he wrote these two awesome books on the topic that I am considering purchasing in a while (once I'm done with what I"m already reading). I've heard rave reviews, and while I don't really plan on flipping properties as my main business, eventually I'd love to rehab condos because I love them, but they aren't a good deal for buy-and-hold which is my long-term game. Besides, they can both be helpful for estimating rehab costs, whether you're planning on rehabbing yourself or estimating the costs for a buyer in a wholesale deal.

http://get.biggerpockets.com/flippingbook/?utm_sou...

I would give you a rundown of all I've found for rehab costs in my market, but you're in Cali and I've heard crazy things about prices there, so I don't think it'd be all too helpful for you. What I recommend is that you find out what approximate costs are for big things like roof repairs; cabinet, and countertop replacements for kitchens; new appliances for a kitchen (dishwasher, fridge, stove); new laminate by square foot, new hard wood by square foot, carpeting, tile; new light fixtures; new door hardware, plumbing hardware; new doors, for front doors and interior doors; interior and exterior paint, by square foot usually I believe; retiling a shower, new sink, new toilet; new HVAC; new windows (per window);

Then take all of this info

(and don't forget to include the installation/labor costs, because a buyer won't be happy and will lower his/her opinion of your business and abilities if you don't include actual costs. Rehabbers don't do their own rehabs, at least, the smart ones don't.)

and put it in a spreadsheet that you keep close by. The goal is to get where eventually you can walk through a property and add up estimated repair costs within about 10-20% or better in your head. You should always overestimate, but still.

Now, as far as the actual ARV, this will be obtained (estimated) by looking at "comps," or comparable properties in the area. You want to find properties that have as close to the same number as bedrooms and bathrooms, and approximate square footage as your house, as well as being in a completely finished condition, or similar to how your property will look. You could go to a professional for this, but I think most wholesalers and rehabbers just end up getting so much practice that they begin to understand how much homes are worth in a given area. If you have contacts or are friends with real estate agents, they could probably be a big help as well.

I don't think you need an appraiser, unless you have one close to you that will do it as a favor or for cheap.

Let me know if anything was unclear or if you have further questions. Good luck!

Brandon Ingegneri · Answer

the best way is to be familiar with your market. Comps don't necessarily mean anything unless you know what your looking at. Example, my personal home is in a neighborhood where houses sell mid 100's. My particular street has a much higher demand and houses sell much closer to 275. You would never know that looking at comps all around. You get a general idea, but first hand knowledge and due diligence is something that you have to gain by looking into deal after deal until you know an area cold within 10-15k