Avoiding 3 Common Pitfalls to Nail your After Repair Value (ARV)

Arguably the most crucial aspect of your rehab analysis is your estimated sale price or “After Repair Value” (ARV). If you don’t hit your ARV, your entire project analysis falls apart. Your repair budget is meaningless if you don’t achieve your expected remodeled value.

Estimating and hitting your estimated ARV is an art form that takes practice. Unfortunately, its rare to estimate an accurate ARV on your first few rehab projects. Even if you’re carful, emotion is bound to take hold of your ARV and you will most likely over estimated the end sale price of your home.

There are several pitfalls of which any rehab investor must be aware.

Pitfall #1 – Relying Solely on the Numbers

A common strategy for estimating the ARV of your property is to look at similar comps and establish and average Price/ SQFT. Many of us want to maximize the use of quantitative figures to reach this useful metric. Its a novel idea to think that we can obtain a sufficient amount of quantitative data to qualify comps and obtain an accurate basis for our ARV. The raw truth is that the numbers only tell part of the story. No matter how detailed and comprehensive your comp analysis, it is impossible to capture all of the potential variables that will eventually impact the sale price of your rehab project.

The numbers are only one aspect of establishing your ARV. While the numbers certainly drive your ARV, its essential to give sufficient weight to the qualitative attributes of your comps.

Below are just a few of the qualitative variables that will impact your eventual sale price:

• Corner lot
• Yard
• Driveway
• Business of street
• Condition of neighboring houses
• Character of the neighbors
• Garage (Attached/ Detached)
• Style of Home
• Location of Master Bedroom (1st Floor vs. 2nd Floor)
• Location of laundry hookups
• Patio and outdoor gathering area

Pitfall #2 – Ignoring Unique “Quirks” and Outdated Styles

When you’re on the verge of an exciting rehab project, its natural to let emotions take hold of your decision processes.This may lead you to block out certain quirks within your house that home buyers may find undesirable. In our experience, its critical to eliminate as many quirks as possible by either passing on a project or addressing the issues during the rehab. Its extremely frustrating to receive feedback from potential buyers such as: “The house is nice, but the dormers make the bedrooms feel small” or “I would love to live here, but the kitchen is all the way in the back of the house…disconnected from everything else”.

There are countless thoughts and opinions that run through a potential buyer’s mind when she is thinking about making a home purchase. It is impossible to account for all these variables and to predict how your eventual buyer will value them. Nonetheless, you must think of the masses and make every attempt to eliminate potential for home buyers to devalue your property.

Stay up to date with the latest trends and expectations of homeowners. There used to be a day where homeowners covered every wall with wallpaper. Today, many home buyers balk at the idea of spending countless hours peeling wallpaper and the underlying glue! The same goes for popcorn ceilings. What used to be the trendy, stylish way to accent your ceilings has become an eyesore for the potential homeowner.

You should consistently peruse sites like Zillow Digs, Houzz, Pottery Barn and Restoration Hardware to stay up to date with the latest in home style.

Some quirks are impossible to mediate. Be sure to become aware of such issues prior to purchasing the home. Will this quirk have a significant impact on my ARV? If so, what can we expect that impact to be? Does the deal still make sense?

Undesirable quirks and out of date style will certainly play a role in your eventual sale price. They may also hinder your deal by making the home take longer to sell. Maybe you get your ARV, but you incur an extra 2 months of holding costs while you wait for the right buyer.

Pitfall #3 – Choosing Comps that are too Old

Real estate markets constantly change. The variable of time can have a drastic impact on your ARV and the profitability of your rehab project as a whole. When choosing your comparable sales, you must be make sure that the recent sales happened within the last 3-6 months. Any sales prior to this time period are out of date and should be analyzed with extreme skepticism.

This can be a difficult rule to follow with unique homes in areas with few recent comps. Sometimes there just aren’t enough recent sales within 3-6 months to provide valid Comps for your rehab. This doesn’t mean you should absolutely walk away from teh deal. However, you must proceed with caution.

One potential positive of fewer recent sales is that home owners in the area are happy with their homes and are not interested in selling. This is a sign that the area is highly desirable and home buyers may be willing to pay a premium for a completely rehabbed home. Nonetheless, it limits your sample size of comparable homes and hinders your ability to conduct an accurate ARV analysis

Fewer recent sales is a sign that your target property is in a niche area with a smaller pool of potential buyers. If there are less recent sales in the area, this means that buyers are not flooding to the area to buy homes. Again, this isn’t necessarily a negative…it just means you must be careful in analyzing comparable properties and determining your ARV.

Action Steps

1. Incorporate an adjustment mechanism to “discount” or “augment” your comps based on qualitative attributes.
2. Consider “Quirks” at the onset of your project. If its impossible to eliminate undesirable features, consider passing on the project.
3. Stay up to date with the latest styles and trends. (Zillow Digs, Houzz, Pottery Barn and Restoration Hardware)
4. Use strict criteria for the age of your comps. E.g. Only use comps that have sold within the last 6 months
5. Stay Conservative – As with all of your project estimates, stay conservative with your ARV. An overestimated ARV will kill your project. Keep it conservative and celebrate if and when you exceed it in the end.

In the end, the market will dictate the final sale of your home. All you can do is get as close as possible and maintain conservative estimates to protect your investment. No matter how much time you spend analyzing ad tweaking your numbers, the buyers have the final say. As you buy and sell more real estate, you will develop an instinct for the ARV of your projects. You will understand your market and become an expert at predicting what your buyer is looking for. The key is to do your best to protect yourself on every deal. After all, if you the house doesn’t sell at the end, there is no point to taking on the project to begin with.