You probably haven’t heard this exact saying: “A fool knows the price of everything and the value of nothing.”, but it may sound familiar. That’s because it rings true, especially for those of us in real estate investing.
In this post, I’m going to give you a roadmap for how to calculate ARV for a property. Because if you don’t have this skill, nothing else in real estate matters. This is something that will be paramount to your career as an investor. The ability to determine a property’s value quickly and effectively is nothing less than essential to any investor’s ability to even turn a profit.
I often see people speculating on the value of homes, and it’s just not a good path to go down – trust me. You want to make your decisions based on rock-solid data and (when available) expert input.
So let’s get going. Here’s the process flow of figuring out what to pay for your real estate investment property.
And let’s be clear, when we talk “Value”, there are really only two numbers that matter:
If we limit our conversation to looking at houses that need work, to either wholesale to other investors or to buy yourself and renovate, then my recommendation is to ALWAYS figure out the ARV first, then work your way backwards to the As-Is Value to determine what to pay for a property.
Read that part again – it’s important!
Knowing the Accurate After Repair Value is extremely important – you really have to nail this down! If you underestimate a property’s ARV, someone could easily outbid you and snatch up a house you were eyeing… or you could end up paying way too much for a property and losing your shirt on the deal. These are some pretty big risks and highlight just how critical it is that you become adept at effectively getting to an accurate ARV.
There are three main ways to go about determining a property’s value:
If you are out there looking at 20 potential deals a day to buy, you’re not going to consistently be able to use options two or three. Realtors won’t generate 20 CMAs a day for you no matter how good they are. And appraisers are expensive and take time, while you have to make an offer quick! So this post will focus on number one – determining value yourself. This is a skill that, in my opinion, you absolutely must learn!
Now, if you’re rehabbing a house and need to determine what price to list it at, then that’s a different story. Find a great realtor to help you, put together a CMA and come up with the optimal offering price!
But if you’re out there making 5-10 offers a week, then you need to move quickly and be able to do this yourself on the go. So let’s talk about how to do that.
Your starting point should be comparable sales. Find actual sales data within the last 6 months of similar houses to your subject property. The properties that sold should be similar to yours in:
The comparable properties don’t have to be exactly like yours. You can make adjustments to your value based on differences in sq ft, bedrooms, baths, basement, etc. But the properties should be as similar as possible.
Multiple Listing Service: Your single best source of comps will be from the multiple listing service, or MLS. There is no more complete source of data than the MLS, hands down, in most markets. Unfortunately MLS guards their data very closely and you typically must be a licensed agent in that MLS jurisdiction to access it.
Non-MLS Online Resources:
Now, you can also find some affordable paid online resources that may aid in your quest to determine property value. These are a bit trustier (yes, it’s word, well, kind of) than the free resources, and are less expensive than paying an appraiser:
Ultimately, if you’re an agent then you should be relying on MLS for most complete data and if you’re not an agent, then find a good one to work with some that they can supply you with reliable comps, especially if you’re in a “non-disclosure” state.
Once you have accurate comps, I recommend creating a rough “$ per sq ft” ARV real estate estimation. You can take an average of the relevant comparable sales properties of the $ per sq ft sales prices. You can then add or subtract if your subject property has less or more of something: bedrooms, baths, finishes, amenities, etc. Again, remember, this is as much of an art as it is a science.
Now that you know what the property will be worth once the renovations are complete, you have to estimate what it will take to get there. I.E. what the repairs will cost.
There is no substitute here for experience. Read this article I wrote recently on how to estimate repairs on any project for wholesale and rehab deals for a more in-depth look at this topic.
So, you know the ARV. You know the repairs. Most of the work is done. From here it’s easy. Whether you’re going to wholesale this deal or buy it yourself, make some guesses about closing costs, assign your wholesale fee (if applicable) and use the Max Offer Calculator to tell you what the Maximum Allowable Offer should be. Check out this video:
I tried to keep this short and sweet, so if there’s anything I left out, comment below and I’ll answer your questions. I’m also going to post a few additional resources for you below to check out! (If don’t want to do the work yourself, you are also welcome to try our real estate comps software, which does the calculating for you).
Remember: “An investment in knowledge pays the best interest.”
~ Benjamin Franklin
Talk again soon,