Positively knowing the ARV of an REO

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Positively knowing the ARV of an REO

Phil M.
Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes

Okay..I've come to a point where I believe I've definitley found some good deals, and I'm about to make offers on them.
But before I do, I need to be positive on the most important aspect of a supposed "deal": knowing the After Repair Value of a home. I feel this is the most important aspect because If I get a deal for a home for even $500.00, If the ARV Isn't significantly more than that price, than it isn't really a good deal at all! So, obviously, this is key. In fact, from what I can understand, the most important thing about fixing and flipping.

That being said, I need to know the ARV for me to make offers on REO homes. Why? Because I need to Calculate what I can offer on the home for it to be profitable. For example:

Asking Price of REO: $200,000 (Irrelevant)

After Repair Value: $220,000
Closing Cost: - $10,000
Holding Cost: - $4,000
Misc. Expenses: - $3,000
Repair Cost: - $23,000
Profit: - $24,000
Max offer price: $156,000

As you can see, the ARV, is the defining factor in what I can offer, not anything else. That being said, and seeing how important it is, what's the best way to positively know what you can see the home for after you repair it?
I've looked at similar sales prices, and sales price of the home in the last few years, and what the county has in their records for the home market value (for taxable purposes), but nothing is perfect, and I need a written in stone value for me to be confident that I'm going to fix up a house that will be worth a certain amount of money, and not all of a sudden the home being worth say, $24,000 less than I thought the after repair value would be.

- So whats the best way to know the ARV?

- How accurate/expensive are BPO?

- Will the appraisal after my offer is accepted give me both as is values and after repair values?

- Is the ARV the exact same thing as the market or retail value of the home, and how much will the quality of repairs/upgrades (no serious remodeling of the home, just keeping it simple) dictate the ARV?

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y

What you want does not exist. You can make your best stab at it by looking at current (< 90 days), nearby (< half a mile, same neighborhood), similar (same style, same beds, same baths, same finish levels, similar square footage, similar location) properties, and get an idea. An appraiser can use this to come up with an exact number. But no guarantees that another appraiser will come up with the same number.

Things could happen between now and when you sell. Congress could start a new "first time buyers" program. The Fed could jump up interest rates. Terrorists could bomb a major city. Any of these would significantly impact your value.

A few years ago you could be optimistic, and use the best possible comps. Now, you must be pessimistic, and use the worst possible comps. You need to consider that if there are tons and tons of REOs in an area, and only a few retail sales, they appraiser may well end up using some of those REOs as comps.

You've missed the money costs in this deal. If you're borrowing hard money, you need to allocate anther $15-18K into your deal. You've also underestimated your closing costs. On the buy they will be something like $3000. But on the sell you can figure something more like $22-25K depending on how much concessions you have to give. If you FSBO it or you're an agent, you can save about 3% of ARV, or about $6600 in this case. But don't expect to sell a property to a retail buyer and not pay for their buyer's agent.

The 70% rule is the simplest. 70% of ARV for the starting point. Subtract the repair costs. That's your max price. In your case, with a $220K ARV, 70$ is $154K. With fixup of $23K, the most you can pay is $131K. Assuming you fund the deal with hard money, and borrow $154K, 70% of ARV, you hold it for six months, and then sell at ARV, you should net about 15% of ARV, or $38K in profits. When things inevitably go wrong, it will eat into that profit.

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  • Jim Wineinger
    Real Estate Investor · ten mile, TN · Member since 2009 · 1k+ posts · 374 votes
    16y

    There will never be a way that is set in stone, as you called it. Basically it is an estimation of a qualified person who has a proven track record of being close to accurate that will be your best "stone" amount.

    This is usually an independant appraiser who you will pay to look at your home and tell you what is wrong with it and what the estimated value would be if it were fixed. Do not even indicate what you think the value should be. Let him tell you, and go from there.

    The BPO from a reputable broker may be the next best price for you. But since their commissions are based on price I would discount that figure as much as 10%. They have had so many appraisals done that most of them can get pretty close on their own without having an actual appraisal done.

    Quality of repair work used to matter as appraisals took them into account when they came to the home and did an "on-site" appraisal and noted the special things about a particular house. But more and more the appraisals are done as a "driveby" or "internet" appraisal, so those things do not really matter as much anymore, except maybe in the higher priced homes.

    2Reply
  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    16y

    A lot of investors use 70% of the ARV after all repairs, holding costs, insurance, etc.
    Example:
    220K ARV
    Closing Cost: - $10,000
    Holding Cost: - $4,000
    Misc. Expenses: - $3,000
    Repair Cost: - $23,000

    Total of above is 40K.

    220K ARV, 70% is 154K, minus the 40K, purchase price should be 114K, or less.

    Ray in Ct

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    What you want does not exist. You can make your best stab at it by looking at current (< 90 days), nearby (< half a mile, same neighborhood), similar (same style, same beds, same baths, same finish levels, similar square footage, similar location) properties, and get an idea. An appraiser can use this to come up with an exact number. But no guarantees that another appraiser will come up with the same number.

    Things could happen between now and when you sell. Congress could start a new "first time buyers" program. The Fed could jump up interest rates. Terrorists could bomb a major city. Any of these would significantly impact your value.

    A few years ago you could be optimistic, and use the best possible comps. Now, you must be pessimistic, and use the worst possible comps. You need to consider that if there are tons and tons of REOs in an area, and only a few retail sales, they appraiser may well end up using some of those REOs as comps.

    You've missed the money costs in this deal. If you're borrowing hard money, you need to allocate anther $15-18K into your deal. You've also underestimated your closing costs. On the buy they will be something like $3000. But on the sell you can figure something more like $22-25K depending on how much concessions you have to give. If you FSBO it or you're an agent, you can save about 3% of ARV, or about $6600 in this case. But don't expect to sell a property to a retail buyer and not pay for their buyer's agent.

    The 70% rule is the simplest. 70% of ARV for the starting point. Subtract the repair costs. That's your max price. In your case, with a $220K ARV, 70$ is $154K. With fixup of $23K, the most you can pay is $131K. Assuming you fund the deal with hard money, and borrow $154K, 70% of ARV, you hold it for six months, and then sell at ARV, you should net about 15% of ARV, or $38K in profits. When things inevitably go wrong, it will eat into that profit.

    3Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    16y

    Not much to add here! But when you have your appraisal done, if you have a punch list of significant changes, ask for your appraisal to be done with repairs made as well as existing "as is" value. I have usually gotten that for nothing extra, but I gave them alot of business, so it might be an extra $50.00. As to a BPO, I don't put any stock in those at all but as pointed out, if you subtract 10% you probably wouldn't hurt. In three months a local market can change in some places. Good Luck...

    0Reply
  • G. F.
    Real Estate Investor · New York, NY · Member since 2008 · 105 posts · 69 votes
    16y

    You have received great advice so far. How are you financing the property and what is your exit strategy?

    You many need to double your closing cost.

    0Reply
  • Phil M.
    OP
    Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
    16y
    Originally posted by G. F.:
    How are you financing the property and what is your exit strategy?

    You many need to double your closing cost.

    I plan on financing through a private lender who will be actively overseeing the investment, who also owns a construction company that we may be able to utilize. The exit strategy is fix and flip, and if we need to hold for a bit we may rent month to month.

    0Reply
  • G. F.
    Real Estate Investor · New York, NY · Member since 2008 · 105 posts · 69 votes
    16y

    Taxes eat up a large chunk of your closing cost.

    NYC Real Property Transfer Tax:
    1% - Sale Price less than 500K
    1.425% - Sale Price greater than 500K

    NYS Real Property Transfer Tax
    .4% of the Sale Price

    NYC Mortgage Recording Tax
    ($2.05 for each $100) - ($30) - Sale Price less than 500K
    $2.175 for each $100 - Sale Price greater than 500K

    Using your ARV of 220K, I calculate your Max Offer as:

    220K ARV x .70% = 154K - 26K Repair & Misc. Expenses = 128K Max Offer

    Closing Cost:

    Purchase
    $1792 - NYS, NYC Transfer Tax - 1.4% of 128K
    $3127 - NYC Mortgage Rec. Tax - $2.05/$100 of 154K
    $2000 - Title Insurance & Junk Fees

    Retail Buyers will also ask for closing cost assistance.
    $3080 - NYS, NYC Transfer Tax - 1.4% of 220K
    $4510 - NYC Mortgage Rec. Tax - $2.05/$100 of 220K
    Paying 3% ($6000) of their share in typical.

    I'm not sure what the terms that your private lender is willing to lend so I'll use a 6 months 15% Interest Only loan with 5 points at closing.

    So than means $7700 in points upfront and $11850 in holding cost due upon sale to the retail buyer.

    You can save $5300 by using a CEMA when selling to retail buyers.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    16y
    Originally posted by Raymond Bettley:
    A lot of investors use 70% of the ARV after all repairs, holding costs, insurance, etc.
    Example:
    220K ARV
    Closing Cost: - $10,000
    Holding Cost: - $4,000
    Misc. Expenses: - $3,000
    Repair Cost: - $23,000

    Total of above is 40K.

    220K ARV, 70% is 154K, minus the 40K, purchase price should be 114K, or less.

    Ray in Ct
    This is an inaccurate forumula for how to arrive at your max offer price. It is 70% of ARV less repairs. The cost of holding, resell, etc are paid from your spread of 30%.

    IF the ARV is $220k and the repairs are $23k, then you take 70% of $220k ($154k) less $23k repairs = max offer price of $131k.
    Your stated max offer price of $154k is too high.
    Holding costs also appear to be too low on your calculations.
    To figure holding costs, you need to know how long you will hold. Should be 3-6 months. You need to factor utilities, insurance, taxes, and loan interest. Your stated holding costs appear to be too low.

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  • Phil M.
    OP
    Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
    16y

    The numbers I put up are mostly just for example. The reo I used as an example will probably be worth more than 220k ARV, and is also at a lower asking price. Just trying to get a rough estimate of my numbers, and I do understand the 70% rule. This topic was mainly for the ARV, which is obviously a need to know thing in REI. I mean, I supposed in worst case scenerio the home would be worth $220k, but more than likely is worth more than that comparably and from past sales (sold for $365k in 05).

    But again, ARV is need to know, and once I know that I can figure which will be a good deal and what I can offer, and therefore is really the last step I'm going to take before I actually go through with making offers, and finally (hopefully) starting up my investment business.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    16y

    The ARV is nothing more than opinion. That said, you must be conservative in your numbers and not use teh hgihest comps and "best case scenario" as your ARV figure.

    Get all the comps, visit i person each comp (very important), find out if you can what the comps have inside, and then calculate what list price would move the home in a timely fashion. That is the ARV you want to use and how you best arrive at it.

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  • Justin S.
    Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
    16y

    Agree with Will 100% here. Its an opinion.

    A very successful investor in my area told me he only uses comps for properties that sold in under 60 days on market. Everyone may not agree with this, but its how he does it and it works for him in AZ. He also plans on his profit being 10% of the sale price. This is a low margin for some people, but again it works for him and his investment model.

    Ask other investors in your area's how they are coming up with comps. Its basically a learning curve and each market may be different.

    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    16y
    That is just one of several means of criteria you should look at. Again, it all depends on the quantity of comps currently available. Sometimes there are just not enough to be picky/choosy.

    Comps should not only have under 60 DOM, they should also be within 90 days, within the same neighborhood and not extend more than a 1/2 mile radius. They should also be within 15%-20% of the square footage and have similar bed/baths. If your subject property is a 3+2, you should not be using a 5+3 as a comp. You can use a 4+2, but keep in mind that the added bedroom adss X amount to the value.

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  • Jim Wineinger
    Real Estate Investor · ten mile, TN · Member since 2009 · 1k+ posts · 374 votes
    16y
    Originally posted by Phil Mondiello:
    The numbers I put up are mostly just for example. The reo I used as an example will probably be worth more than 220k ARV, and is also at a lower asking price. Just trying to get a rough estimate of my numbers, and I do understand the 70% rule. This topic was mainly for the ARV, which is obviously a need to know thing in REI. I mean, I supposed in worst case scenerio the home would be worth $220k, but more than likely is worth more than that comparably and from past sales (sold for $365k in 05).

    But again, ARV is need to know, and once I know that I can figure which will be a good deal and what I can offer, and therefore is really the last step I'm going to take before I actually go through with making offers, and finally (hopefully) starting up my investment business.

    Please, please, please do not try to use any figure from 05 as a basic for anything!!!!!!!!!!!!!!!!! Values have come down 25-50% since then in most areas!!! Therefore your figure of 365K may now be as low as 186K and not your supposed low of 220K. Comps or appraisals should be no more than 6 months old, not 5 years!!!!!!

    0Reply
  • Phil M.
    OP
    Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
    16y
    Originally posted by jawsette:


    Please, please, please do not try to use any figure from 05 as a basic for anything!!!!!!!!!!!!!!!!! Values have come down 25-50% since then in most areas!!! Therefore your figure of 365K may now be as low as 186K and not your supposed low of 220K. Comps or appraisals should be no more than 6 months old, not 5 years!!!!!!



    I know this, just putting it out there..most recently sold comparables have sold for 300+ in the area..so my assumed 220K ARV is conservative.
    0Reply
  • Justin S.
    Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
    16y

    Its only comparable if the houses are the same. Be sure to do your pricing based off price/sq.ft.

    0Reply
  • Phil M.
    OP
    Developer · Staten Island, NY · Member since 2009 · 88 posts · 9 votes
    16y

    how accurate are zillows 'recently sold' homes? are the prices and dates correct at all? im having trouble verifying if i can use these as comparables..

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    16y

    I believe that zillow will give you recorded sales and recorded dates with those sold properties, taken from the public records; if I am correct in what I believe here, then the info would be accurate for dates and prices. Unfortunately, zillow still has the problem of using "as the crow flies" distances, without taking account of things that critically change valuations; so that listed comps may not be really representative comps.

    Two examples of that drawback come to mind. First, you have houses on opposite sides of a street, and the middle of that street is a township boundary such that one side has better schools, taxes, etc. than the other side. another I have seen is where there are houses across a river being used as comps. The river is like the township line, so better taxes, schools, etc. on one side. Or, the bridge connecting both sides of the river is like a mile or more away from those houses, so that they are really 2 miles apart by land.

    Another site you can used to fins sold data is domania:
    http://www.domania.com/Resources/RecentSales/default.aspx

    Not sure if domania has the same drawbacks that I mentioned zillow has, but you know to watch for that now.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    Steve makes a very good point. You really have to get out and drive the area to understand neighborhood boundaries. In one of my farm areas, there's a dividing line that's pretty noticable if you're on the ground. It would not at all be obvious from maps or google earth.

    When comparing specific properties, you have to compare like to like. Ranches with basements can only be compared to ranches with basements. Not to two story houses, tri levels or ranches without basements.

    Beds and baths are as important, or more important than square footage. If you look at sales and compute $/sq.ft. and then use that to compute values based strictly on size, you'll over value large houses and undervalue small ones. There is a difference in value for the larger one, but less than the $/sq.ft. sales price. An appraiser will make an adjustment for the size, but it will be smaller. About half the $/sq.ft., in my experience. Second floor footage is valued less than ground floor footage, and basement footage even less. All that said, some time back I did an analysis for a neighborhood I was considering, and $/sq.ft. was quite consistent for houses with basements. That's total footage. Basement, ground, or second floor didn't matter. Finished or unfinished basement didn't matter. My point is you have to research the specific are and know he values yourself.

    2Reply
  • Eric Byrd
    Sacramento · Member since 2009 · 87 posts · 6 votes
    16y

    Phil,

    Everyone has given great advice in this thread. The main rule of thumb is never use best case ARV, often times conservative is best and safest approach. If you can live with the most conservative approach and still make money, that maybe the best approach...

    With this said, everyone has given the best laid plans on how to arrive at an ARV the best you can..

    0Reply
  • Justin S.
    Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes
    16y

    Jon makes a good point on larger homes selling for less price/sq.ft wise. Be sure to use similar sized homes. In some of my neighborhoods, the larger homes selling nearly $25/sq.ft. cheaper than the smaller ones. I use a +/- 20% for pulling comps. You can also deduct more for houses that back to major streets or highways, or other negative property attributes. Know your neighborhoods.

    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    16y
    That is exactly right! using a middle to low end side of the comps to calculate the ARV (conservative approach) will allow less chance for error. If you do get the best case scenario on your re-sell, that is just the gravy, the key is not to count on the gravy being there.
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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    16y
    Also a great point. I always make sure that the square footage is within +/- 20% of subject property.
    It is like buying in bulk. If you buy a six pack at the store, the pric per can is X. If you buy a case at Cosco, the price per can is Y which is much less. (Quantity discount)
    Same goes for square footage. A home with 1200 squares will sell for much more per square than a home on the same street in the same condition with 2400 squares.
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