How to Determine Your Property’s After-Repair Value
The After-Repair Value of a property is an important determining factor when house flipping.
It’s what you’ll use to sell the property, the number you’ll use to give in presentations to money lenders, and the basis of all your budgets in rehabbing.
The After-Repair Value (ARV) is an estimated value of a property after it has been completely renovated and rehabbed. For example, you can purchase a distressed property for $35,000 but after all rehabbing and repairs are completed, the house can be worth $70,000.
The ARV is arguably one of the most important figures during a house flip. There are many ways and outside factors used to determine this number, which we’ll outline in this guide and how to utilize your market knowledge to determine the most accurate ARV.
Comps is a short word for comparables, which means comparing the house to similar properties that have sold in the area.
The most accurate way to pull comps of a property is through using the MLS and getting help from a Real Estate Agent. Of course, there are websites that will give you property values and other information, but the MLS is the most trusted, accurate way to go.
When having your agent look up comps, urge them to base values on houses that were sold within the past six months and properties that are generally the same size. The three main things you’ll look at in comps are:
- Square footage of previous properties – stay within 100 to 200 square feet difference from your property and the comps
- Number of bedrooms and bathrooms – Try to stay in the same ratio of bedrooms to bathrooms since these tend to add the most value to a property
- Selling prices – The prices of other properties are gonna be the biggest factor in determining your property’s ARV. Stay within a few thousand dollars of the average price of other comps
The three features mentioned in the ARV section are not the only the factors you can use to help determine the after-repair value.
Depending on the market and the area you’re in, items such as air conditioning units or fireplaces can add significant value.
For example: In South Texas, central air-conditioning can add a significant amount of value than a property with window units would have. Same would go for additions such as a swimming pool – properties with pools in areas with generally hot summers will see a dramatic increase in property value.
In an area where it’s cold such as the northeast, a fireplace would be desirable for a potential buyer or a great heating system.
Days On Market
This factor – next to comps – is the second most important determining factor in an ARV. It may be well and great to have a property worth $500,000 but if comps at that price took 12 months to sell….is it worth that much?
Looking at the days on the market, you will see if you want to price a property at a discounted price or full market value. If it’s anything above between 60 – 75 days, it may be best to sell it at a discounted price. Any number lower than that, and you’re bound to get an offer on the full market value.
As you begin to flip more properties and learn the ins and outs of a given market, you won’t have to follow these steps completely anymore. You’ll gain a good judgement of how much a property is worth, how long it will take to sell, and what a good offer on it should be.
Even if you feel pretty secure in your estimations, it’s still a good idea to check comps to get confirmation of your estimations. The last thing you want is to lose profit on a property because you underestimated the value or demand for a property.
You can use that same market knowledge when negotiating offers with potential buyers. Get them to raise their offer by telling them the value of the houses around them or the high demand of properties in a given market.
When in doubt, always remember to use comps to determine the most accurate ARV. The three factors for finding the best comps are square footage, bedroom to bathroom ratio, and selling prices. The amount of days a house has been on the market is also a great indicator of value and how fast a property will sell. No matter how experienced of an investor you are…always, always always pull your comps!