ARV: Everything You Need To Know
To have success in real estate investing, you need a strong foundation to build on. The foundation of a long lasting, profitable real estate investing business is based around sourcing discounted properties. In terms of how to find these properties, that is a different conversation for a different day. Today we will be talking about how to evaluate properties to determine its ARV. ARV is an acronym for after repair value. ARV is arguably the most important factor to making a successful flipping operation. Generally speaking, there are three steps to learning after repair value. First, you must fully learn what it is. Next, why it is important. Lastly, how to determine it. In this blog, we will be exploring everything you need to know when it comes to after repair value.
Now that we know what ARV stands for, we can dive into what the after repair value is. The idea is simple. The after repair value is what a property would sell for once it is renovated. You must know what you can sell a property for, before you buy it. With that being said, a property is worth what someone is willing to buy it for. Therefore, after repair value is an opinion. If you ask several different people what they think ARV is on a particular house, you may get different answers.
If your ARV is wrong, it can cost you thousands of dollars. To avoid this mistake, let’s talk about why ARV is critical. Oftentimes the properties we look at are distressed. To have success flipping a distressed house, you must force appreciation into the property through rehabbing it. The rehab is determined by the ARV you choose. Once the ARV has been established, you now know what kind of repairs to make based on that. If the area calls for granite countertops, you must put in granite countertops. If the area does not call for a finished basement; do not finish the basement. Estimating your rehab before determining your ARV is putting you at risk of over or under renovating the property. If you are interested in how to estimate a rehab for a flip, be sure to check out our previous blog posts after finishing this one.
There are systems and processes that you can use to accurately estimate ARV. Let’s face it, there is risk in all types of investing. It’s important to remember you are taking a risk when you buy a property. Our goal is to minimize that risk as much as possible by becoming experts at ARV. It is important to be proficient at determining after repair value because it reduces risk and maximizes profit.
There are many uniquely different properties, situations, and markets that can make determining ARV quite difficult. However, you are not in this alone. If you are just starting out in real estate, take advantage of the resources around you. This goes for any area of investing, not just after repair value. Your network is your net worth, so go talk to people. Network with local investors in your area. Research your local REIA (Real Estate Investors Association) and talk to those in your market. Join local real estate investing Facebook groups and start asking questions. Network with local realtors; part of their job is pulling comparable sales for properties. These are all people who can help you understand the world of investing, including ARV.
The hardest part, determining ARV. To become a master of evaluating properties, you have to know what something would sell for. How to do that is to pull comps(comparable sales).
Comps are sold properties that are similar to the property currently being evaluated. There are two things to unfold here. To use a property as a comp, it must have already been sold in the past. Properties that are on market or under contract currently can help give you an idea, but are never to be used as comps until they have been closed. Also, to be used as an accurate comp, the details of the properties must be similar. Some examples are: the subdivision it is located in, square footage, property type, year built, lot size, bedrooms, bathrooms, pools, garages, basements, etc… These are all determinants for comps. A good rule of thumb is choose three comps and take the average sale prices of those to get your ARV. There are different ways to do it, it all depends on your risk tolerance. In a perfect world, you have all the comps you need and the ARV is crystal clear. A lot of times this is not the case; adjustments must be made.
Making adjustments to determine ARV is difficult. This is where a lot of investors mess up. Many times we come across properties that do not have many or any comps at all. Each situation is unique. You may see a house similar to your subject property, but it is too far away. There might be a comp next door to your house, but it was sold several years back. This forces investors to make adjustments to the ARV. Just understand that there is a lot of risk in buying a house without comps. You can lose thousands by inflating your after repair value. However, you will not get any deals accepted if your ARV is too conservative. Be careful in making adjustments to ARV when you do not have comps. We recommend talking to a local appraiser about the appraisal rules. If you wish to sell the property once it is renovated, it will need to be appraised before being resold. If there are zero comps anywhere in the area, there are no buyers there. The key takeaway from this is to fully complete your due diligence when you are buying a property. You will lose money if you do not complete your homework.
Once you have determined the ARV with absolute confidence, make your way to estimating the rehab and come up with your MAO (Maximum Allowable Offer). The only thing left is to make the offer! If you spent all this time running the numbers, no matter how low the offer may be, submit it! The worst they can say is no; do not be afraid of it. Failure is required to achieve success, so go out there and make offers!
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