How to estimate home values before and after improvements?

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How to estimate home values before and after improvements?

Dale Couture
Member since 2018 · 8 posts · 3 votes

Forgive me if this has been answered somewhere before...

I am planning on getting into real estate investing in a few years once I finish paying off my student loans. In the meantime, I am trying to learn as much as I can about it. One of my main questions currently comes in the realm of home improvement. I am thinking of buying a single family home for my first investment and I would like to buy something that I can make moderate improvements and repairs to and see a ROI on it.

When looking at real estate listings, without paying for an appraisal for each property, how can I look at a home needing some TLC and estimate what it will be worth before and after repairs and improvements are made? Is there a guide or calculator somewhere that estimates these sorts of things? I am sure every case is a little different. I just need some guidance on spotting the right opportunities out there. Thanks! 

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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
8y

@Dale Couture I don't know what guides you are looking at but they are wrong.  Many guides are designed for homeowners making improvements to their homes. This doesn't really apply to investors buying fixer uppers. 

To figure what it is worth when you are done renovations you use comparable sales to estimate value. Those comparable sales should be comparable in condition to the level you will renovate to. 

To figure what it is worth before renovations you work backwards from the After Repaired Value (ARV). A common formula is ARV X70% - repairs = Maximum offer price. The 30% accounts for all the costs of buying, holding and reselling and your profit. The buying, holding and selling costs (sometimes called soft costs or hidden costs) are often much more than new investors consider. They can easily add up to 10-20% of the end sale price.

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  • Kevin Dougherty
    Lender · Thornton, PA · Member since 2014 · 106 posts · 56 votes
    8y

    Dale - 

    You can start your research by joining your local real estate investment groups available in your area. You will leverage your time and cut your learning curve in-half. If it is a well attended group, every contact you could need will be in attendance from realtors, contractors, lenders, attorneys, accountants and vendors.  

    Good luck

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  • Dale Couture
    OP
    Member since 2018 · 8 posts · 3 votes
    8y

    So it seems that in all the estimates and guides I have found online so far, that no individual renovation increases the value of a home more than the cost of the renovation. So how exactly does anyone make money by flipping unless they are doing all the work themselves?

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    8y

    @Dale Couture I don't know what guides you are looking at but they are wrong.  Many guides are designed for homeowners making improvements to their homes. This doesn't really apply to investors buying fixer uppers. 

    To figure what it is worth when you are done renovations you use comparable sales to estimate value. Those comparable sales should be comparable in condition to the level you will renovate to. 

    To figure what it is worth before renovations you work backwards from the After Repaired Value (ARV). A common formula is ARV X70% - repairs = Maximum offer price. The 30% accounts for all the costs of buying, holding and reselling and your profit. The buying, holding and selling costs (sometimes called soft costs or hidden costs) are often much more than new investors consider. They can easily add up to 10-20% of the end sale price.

    2Reply
  • Garrett Brown
    Real Estate Agent · Member since 2018 · 32 posts · 17 votes
    8y
    Originally posted by @Ned Carey:

    @Dale Couture I don't know what guides you are looking at but they are wrong.  Many guides are designed for homeowners making improvements to their homes. This doesn't really apply to investors buying fixer uppers. 

    To figure what it is worth when you are done renovations you use comparable sales to estimate value. Those comparable sales should be comparable in condition to the level you will renovate to. 

    To figure what it is worth before renovations you work backwards from the After Repaired Value (ARV). A common formula is ARV X70% - repairs = Maximum offer price. The 30% accounts for all the costs of buying, holding and reselling and your profit. The buying, holding and selling costs (sometimes called soft costs or hidden costs) are often much more than new investors consider. They can easily add up to 10-20% of the end sale price.

    Yes, Ned is spot on. I'm not sure what guides you read but there are quite a few improvements that will drastically bring the value of the home up. The old quote "Kitchens and bathrooms sell homes" is extremely true for this along with other things like flooring and curb appeal. Estimating repairs and closing costs is one of the hardest things to do and takes some time/experience of just crunching numbers on deals. Just to give you a ball park of estimate ideas, I usually take the sq ft of house and do some math based off pics and what I know. I'm in Houston so please take this with a big grain of salt because all areas around the US are different. This is just a super basic formula to get some numbers flowing

    15$ per sq/ft = Minor rehab

    20$ per sq/ft = more serious rehab

    $25 per sq/ft =. been gutted and needs everything

    This doesn't apply to major things like Roof, Foundation, A/C, etc because those can vary greatly. This also could go up depending on how high end of a home you have vs. basic flip vs. rental. 

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  • William E.
    Investor · Pearland, TX · Member since 2016 · 246 posts · 136 votes
    8y

    spend $20 and get the book promoted on the site. it could potentially save you 20k on your first deal. 

    The Book on Estimating Rehab Costs

    https://www.biggerpockets.com/store/flipping-estimating-digital 

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  • William E.
    Investor · Pearland, TX · Member since 2016 · 246 posts · 136 votes
    8y

    @Dale Couture - sorry i misread the question. 

    you're looking for finding the ARV. Realtors can typically help you with this, unless you have MLS access.

    You need to find the comparable in the area to determine this information. you'll need to find several properties that were recently sold in that particular area with the upgrades you are planning to add into the house you purchase, and this will give you a 'ballpark' of what it is worth. 

    Alternatively, you could befriend some home estimators and get how they build their calculations. 

    Once you've analyzed an area for a few months, you know what the properties will go for in that area and can tell what it will take to get you there. 

    thoughts?

    B

    1Reply
  • Dale Couture
    OP
    Member since 2018 · 8 posts · 3 votes
    8y

    Ok this makes more sense. So by fixing up a 100k house in a 100k neighborhood, I may not get all my money back out of the improvements. But by getting a 50k house in a 100k neighborhood, I can put 25k into it and possibly get it back to 100k, thereby making 25k. Very simple terms but this makes it clearer for me. 

    3Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    @Dale Couture yes you got it.

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