ARV or After Repair Value is the improved price of a house after it is repaired. To come up with an accurate ARV, you need to take a look at recent sales of comparable properties (comps for short). For most novice real estate investors, they go to an extent of consulting real estate agents or asking their investors’ opinions. No one has most vested interests in your achievements as you do. Therefore, the better you start determining ARVs for yourself, the better you will become at buying right, selling cleverly and making more Profits. Here are the things to bear in mind when determining the best ARV. When evaluating the comps, the most important thing is to get your emotions out of the equation and reason like a appraiser. That is because ultimately when you sell the house, it will not matter about the contract value. What matters most is the improved value.
The best place for finding logical comps is on the MLS. That is also another reason for getting yourself licensed and having access to the crucial MLS. If you cannot access the MLS then, you can find a licensed real estate agent who have the access to MLS and who can provide that information. You can also utilize online tools to make informed decisions when buying dilapidated properties to renovate and sell at a profit. There are plenty of independent home valuation websites like Trulia.com, Zillow.com and RealEstateABC.com which can help you estimate the value of a home. Although these sites can give you a general idea of what a house is worth, you should never rely on just one site. It is better to visit a few of them and make sure the estimates agrees. Also keep in mind that these are automated system and can’t account for variables a human could easily identify by doing pulling comps and doing a comparative market analysis by hand
Methods for Determining the ARV
The common question that you will always ask yourself is, “If I make such and such repairs to this house, what amount of cash can I productively sell it on the competitive market?” For you to establish the most accurate price of a particular property, you should analyze the following:
Similar in Features: When evaluating comps, the more similar in features you get to a property, the better. For instance, a comp that measures 2,000 sq ft is not as significant to a subject property measuring 1,000 sq ft. The two factors do not at all compare. If the particular property measures 1,000 sq ft, you should compare it to other properties of similar measurements like 900 sq ft or 1200 sq ft. The closer the features of comps are to a particular house, the more applicable they are.
Proximity: The next ting to consider is the distance of the comp from the particular house. The thumb rule only looks at comps that fall within one mile from an individual property. The nearer in proximity the comp is to the property, the more applicable it is. However, you should note that the distance is determined by the market. For instance, if a particular property is built in a land with five-acre parcels, then you are supposed to apply wider search formula. If the subject property is in a very condensed area then, do not exceed half a mile.
Property Type: There are three main types of things involved when evaluating comps. They include private sales, Real Estate Owned properties, and short sales. If your property is fully renovated, you should apply “Private” sold comps to establish its ARV. However, you should know that if there are more short–sale comps and REO properties than “Private” comps, the short sales should be considered since they now become part of the market. If you are searching for a subject property and you have few private Comps and mostly short–sale comps, you should consider that as a risky place for investment. You require an adequate supply of private sales.
Comparables: The most critical comps to consider when determining the ARV are the sold comps. The essential thing to consider in sold comps is the date it sold. Indisputably, a comp that sold just yesterday is more relevant than one that sold two years ago. Preferably, you should use comps that do not exceed 90 days old. You should bear in mind that when you buy a property, it will take between one and three months depending on the extent of repair before it is reabsorbed in the market. A 90-day–old comp will, therefore, be four to five months old when it is ready for resale. Due to this reason you should use the most recent comps when determining your ARV. Preferable ones should be at least five to six sold comps that are less than 90 days old, within half a mile and with comparable features. If you cannot find at least five, then you have no enough sales activity to justify the ARV of the particular property. The bottom line is attaining as much certainty as possible as about the ARV a house.
Pending Comps: Pending comps are also important to consider because they will likely be your newest sold comps when you are ready to relist the house in the market. They are good as far as comparable sales are concerned.
Active Comps: You should also consider the Active Comps listed on the market. Active comps are someone’s competition. You should primarily assess the DOM. With active comps, the DOM is the actual number of days since its listing to the current date. The duration the active comps have been sitting on the market should give you a good indicator as to how fast the homes are selling as compared to the listed price.
Days on Market: You should also look at the DOM when determining the ARV. DOM is the number of days starting from the date the property was declared for sale to the day it went under contract or pending. When a listing is announced pending, one does not know the exact contract price until it becomes a Sold Comp. Nevertheless, the DOM means more than that. For instance, if a house was priced at $249,900 and declared pending in 5 DOM, probably it was almost a list price offer. That is because it only lasted for five days before its sale. On the other hand, if the same property got pending in 212 DOM, it was most likely priced too high. The most right deal here is getting like two to three solid pending comps with similar in features and within a half-mile of the particular property.
Understanding comparative market analysis (CMA) and knowing how to determine the ARV of houses is very critical since your entire investment depends on the correctness of this calculation.