Primer - Estimating ARV

54 Replies

I've seen a couple threads over the past week where the OP has questioned how to find comps and estimate ARV. Marty Boardman and I discussed this topic a bit at the BP Summit last month, and I also put together a quick primer that I distributed to those who attended our Summit presentation.

This 10-page document certainly isn't an "everything you need to know about doing appraisals and estimating resale value," but should be enough to teach anyone the basics of estimating ARV.

Let me know what you think...

http://www.biggerpockets.com/files/user/JasonScott/file/estimating-arv

I must have missed this one but I just looked through the document...what a great resource. All new investors on BP should take a look at this to get an idea of the basics and from there they can learn more specifics. Another great resource from J!

Thank you for this post! I have been reading and reading for the past few days, and I just want to say thank you J Scott for all of the great info you have contributed to this website! I am learning so muc, and have so many questions, but I'm trying to answer them before I post. You guys are making it too easy!

Hello, I am a newbie. I just looked at your Guide to Estimate ARV. I don't understand the -'s & +'s. If comp 3 was a newer built house with 4 bedrooms why the -3k for age, +5k for good condition, but the other comps were EXCELLENT condition, more SF -8k. I'm confused!

Originally posted by @Louise Whidby :
Hello, I am a newbie. I just looked at your Guide to Estimate ARV. I don't understand the -'s & +'s. If comp 3 was a newer built house with 4 bedrooms why the -3k for age, +5k for good condition, but the other comps were EXCELLENT condition, more SF -8k. I'm confused!

Louise Whidby, those are the adjustments being made to the subject property, not the adjustments to those comps. So since the comp was larger, the adjustment to the subject property would be -3k for age.

@Louise Whidby , I think what @James Vermillion meant was: "So since the comp was NEWER, the adjustment to the subject property would be -3k for age."

For example: You are looking at a comparable property that is mostly similar to your subject property. In every other way, they are the same, except for age. The comparable property is a few years newer than the subject property, and therefore worth a little more. Maybe the comparable recently sold for $100k. So you might then say that the subject property is worth $97k. ($100k - $3k)

Of course, there's not usually just one difference - there are many. So you take off a little here and there, and add back on in other places to arrive at a final number.

Hope that helps. I don't think it's worth a whole class!

Michael

@Louise Whidby , no worries. Maybe I can explain better. Lets look at two properties.

Property A (subject property): 10 years old, 1700 sq ft, 3 bedrooms, 2 baths (lets just look at those items to keep it simple).

Proberty B (the comp): 5 years old, 1500 sq ft, 3 bedrooms, 2 baths

We determine the following adjustments need to be made:

Age: -7,000
Sq ft: +5,000
Bedrooms: none
Bathrooms: none

If the comp sold for $150,000 we would subtract 7,000 because the subject property is older and add 5,000 because the subject property is larger, leaving us with a total adjustment of -2,000.

Based on this very limited example, the subject property would have an ARV of $148,000.

Does that help at all?

Originally posted by @Michael D. :
Louise Whidby, I think what James Vermillion meant was: "So since the comp was NEWER, the adjustment to the subject property would be -3k for age."

For example: You are looking at a comparable property that is mostly similar to your subject property. In every other way, they are the same, except for age. The comparable property is a few years newer than the subject property, and therefore worth a little more. Maybe the comparable recently sold for $100k. So you might then say that the subject property is worth $97k. ($100k - $3k)

Of course, there's not usually just one difference - there are many. So you take off a little here and there, and add back on in other places to arrive at a final number.

Hope that helps. I don't think it's worth a whole class!

Michael

Thanks Michael D...I messed that one up!

@ Mike & James Thank you guys so much for taking the time to break that down. I understand a little bit better. I guess the more I have to do the math the more I will get it, but I do understand better. Thank you!..... I love BP!

Originally posted by @Louise Whidby :
I need to find a way to save this page! lol! I'm gonna need this info

Louise Whidby, at the top of the page there is a box that says "monitor topic"...check that box.

Then you can click on "my watched topics" to see all the threads you have saved. Good luck!

Gm BP!!! So this is my bottomline question, now that I understand comps and ARV a little better. How is the Wholesale price determined that I will negotiate with a motivated seller? .... I am speaking with Investors that want me to find them property and they always end the conversation with "As long as the numbers make sense"

Louise, a good rule that many rehabbers use is the 70% rule. Here is how it works:

* Take the ARV you determined based on the comps (lets call it $150,000)

* Take 70% of the ARV (150,000 * .70 = 105,000)

* Now determine how much money is needed in repairs to get the property in a condition to fetch the ARV price (for this example, lets say you determine the property needs 30,000 in repairs)

* Subtract the repair costs from your previous number (105,000 - 30,000 = 75,000)...that would be the max purchase price.

Now, that is a rule many rehabbers use but it will depend on your market. What is missing though is your profit...so you need to subtract whatever you want to make on the deal. If you want to make 5,000 you need to put the property under-contract for 70,000.

Please keep in mind I simplified this quite a bit and every market is different. You need to find out what investors are looking for in your area.

Here is a great article about the 70% rule that explains it better than I just did:

Flipping Math

Just wanted to say thanking you for taking the time to give back with this well of information. Estimating ARV was one area which I was so confused. This has definitely put my wife and I on the right path. Thanks again.

CPHomeVestors

@J Scott,

Some reason, I tried to open the file, but it is not there anymore, I just created the account last week and I am looking for all the resources I could find.

Would you email me that doc please?

and any other info that you think might help me?

Hope to hear back from you soon,

Rishi