How to Accurately Determine After Repair Value (ARV)
ARV is the process of reviewing the most relevant sold, pending, and active comps to determine the best price that the home will sell for after repairs are made. I am amazed (blown away) at how many investors do not learn how to analyze comps and determine ARV. For many novice investors, the extent of determining ARV is limited to calling an agent and asking her opinion (as if they know or care). Listen, this is very important – no one has as much of a vested interest in your success as you do and the better you get at determining ARV, the better you will be at buying right, selling right and making more money. The goal with ARV is to make it more of a science and less of an art. This is one aspect of the business that must never be outsourced.
Think Like an Appraiser: When analyzing the comps, the key is to think like an appraiser because ultimately when you sell the property, it doesn’t matter about the contract price – what matters is the appraised value. Although I disagree with some of the methods appraisers use and follow to determine value, you must use the same methods to determine ARV.
Finding Comps: The best place for finding relevant comps is on the MLS. This is yet another reason to become licensed and get access to the MLS. If you don’t have access to the MLS then you need to get with a licensed real estate agent who does have access and who can get you this information. There are other third-party sites that have data such as trulia.com and zillow.com, but they are not as current, extensive or as accurate as the MLS. Remember, the data goes first on the MLS and then rolls over to other public sites.
Criteria for Determining ARV: The golden question that you always ask is, “If I make XYZ repairs to this property, what can I realistically sell it for on the open market?” In order to determine the most accurate value of a subject property, analyze the following:
Similar in Features: When analyzing comps, the more similar in features to the subject property, the better. For example, a comp that is 2,000 sq ft is not as relevant to a subject property that is 1,000 sq ft. The two don’t compare. If the subject property is 1,000 sq ft, we want to compare it to other homes of similar square footage (900–1,200 sq ft). The closer the features of the comps are to the subject property, the more relevant they are.
Proximity: The next thing we’re going to look at is distance of the comp from the subject property. The rule of thumb is only look at comps that are within 1 mile from the subject property. The closer in proximity the comp is to the subject property, the more relevant it is.
**Note: Distance is based on the market. For example, if a subject property is located in an area that has five-acre parcels, then obviously you’re going to have to use wider search criteria. If you’re in more of a condensed area, then do not go over half a mile.
Type: There are three basic types of properties when analyzing comps: REOs, short sales, and private (retail seller/homeowner) sales. Since your property is going to be fully renovated, you want to use “private” sold comps to determine the ARV. Be aware though that if there are more REO and short-sale comps than private comps, the REOs/short sales must be considered because they now make up the market. If I am looking at a subject property and there are few private comps and mostly REO/short-sale comps, I consider that a risky area to invest in. You need a healthy supply of private sales. I call this “strong sales activity.”
Sold Comps: The most important comps to look at by far are the sold comps. The key to sold comps is the age of the comp (date it sold). Obviously a comp that sold last week is much more relevant than one that sold a year ago. Preferably, we want to use comps that are less than 90 days old. Keep in mind that when we purchase a property it will take 1–2 months (or longer depending on the extent of the rehab) before it’s back on the market. A 90-day-old comp may now be 4–5 months old when we’re ready to re-sell the property. For this reason we want to use very recent comps when determining the ARV. I prefer to have at least 5–6 solid sold comps less than 90 days old, within half a mile and similar in features. If I can’t find at least 5 then there is not enough sales activity to support the ARV of the subject property. Remember, you want to have as much certainty as you can as to what the ARV is.
Pending Comps: Pending comps are important to look at because these will more than likely be your newest sold comps once you’re ready to relist the property.
Days on Market (DOM): You also want to look at the “days on market” (DOM). Days on market is the number of days from when the property was listed for sale to the day it went pending (under contract). Once a listing is marked pending, you do not know the actual contract price until it finally closes and becomes a sold comp. However, the DOM tells a story. For example, if the property was listed for sale for $249,900 and went pending in 5 DOM, it probably was a near list-price offer because it only took five days for an accepted offer. Whereas, if that same property went pending in 212 DOM, it was probably priced too high. I like to get 2–3 solid pending comps that are similar in features within a half-mile radius of the subject property.
Active Comps: You’re also going to look at active comps listed for sale. Active comps are your competition. You especially want to look at DOM. With active comps, DOM is the number of days from when it was listed to the current date. How long active comps are sitting on the market will give you a good indication as to how quickly homes are selling relative to the list price.