ARV slows down deal analysis... right?

20 Replies

I'm in the midst of @Brandon Turner 's 90 day challenge where I have committed to analyzing at least one property every day for 90 days. So far, I've really learned a lot about the many facets of deal analysis and in particular, the components within the Bigger Pockets calculators that I can safely assume on... But ARV gets me every single time.

On one hand, I'm supposed to find a property to analyze, punch the numbers in and move on, learning what I can along the way. (per the challenge)

On the other hand, After Repair Value isn't something you can just guess on. In order to do it right, you either have to rope an agent into the mix (who has the means with which to do the CMA appropriately) or spend far more than the 15 minutes that I'm expected to spend on analyzing deals every morning.

I feel like at this stage, I'm analyzing deals and more or less guessing on ARV but that's a HUGELY important figure to get right, so my deal analysis is rather moot if I'm just guessing ARV...

Does anyone have any processes to share that make calculating ARV a bit more streamlined? What am I missing?

@Jason Howell ARVs or comps is a bit of an art.  Even realtors will vary.  For your purposes, I would think that a rough guess would be fine.  Those 15 minutes tell you if you want to take a close look at the property, where you'd really try to nail down numbers as close as possible.

Here's how I do ARVs.  Ideally, you will be able to find recently (last 6 months, or even the last few weeks) sold properties (at least three) that are as identical in features (style, beds, baths, square footage, lot size, condition) in the same neighborhood as your subject property.  Then is it simple.  The subject property should should be right in the range of those properties.

But in reality, This almost never the case.  So the trick is in making allowances.  Maybe yours is a 1 bath, and all the others are 1.5 bath.  Then find another group of houses that have both 1 bath and 1.5 bath houses, that are identical to yours in every way, except maybe they have a two car garages, where yours has a one car garage, and are otherwise identical to each other.  You might notice that that the ones with an extra half bath sold for $8k more, on average, than the ones with one bath.  Now go back to your house and your three or more comps that all have 1.5 baths, take the average and subtract $8k.

This is still a pretty simple scenario.  In truth, your subject property will probably vary in a number of ways from the comps, so you need to calculate these allowances for each one of those differences.  Maybe in addition to this .5 bath difference there is also a 100sqft difference, maybe also 2-car wide driveway vs a 1-car wide driveway.  Maybe a pool vs no pool, etc.  Calculate an allowance, up and down for each one of them.  That's how I get my ARVs.

@Jason Howell Thanks for the great question.   I was stuck on this same step and I wanted a way to come up with a realistic figure that takes my wishful thinking out of the equation.  @Larry T. This is essentially what I have been doing, but probably less accurately since I do not have access to the MLS at this point. What websites do you use to find your comps?

Originally posted by @Stephen Burtin :

@Jason Howell Thanks for the great question.   I was stuck on this same step and I wanted a way to come up with a realistic figure that takes my wishful thinking out of the equation.  @Larry T. This is essentially what I have been doing, but probably less accurately since I do not have access to the MLS at this point. What websites do you use to find your comps?

I don't have MLS access either. You can see sold prices on zillow, and the sold homes section of realtor.com, and probably on other sites.  Keep in mind that there are other details that you won't know that affect the price, like cash back from seller for buyer closing costs, or type of financing.

Originally posted by @Larry T.:
Originally posted by @Stephen Burtin:

@Jason Howell Thanks for the great question.   I was stuck on this same step and I wanted a way to come up with a realistic figure that takes my wishful thinking out of the equation.  @Larry T. This is essentially what I have been doing, but probably less accurately since I do not have access to the MLS at this point. What websites do you use to find your comps?

I don't have MLS access either. You can see sold prices on zillow, and the sold homes section of realtor.com, and probably on other sites.  Keep in mind that there are other details that you won't know that affect the price, like cash back from seller for buyer closing costs, or type of financing.

 I was using realtor.com, but for some reason the sold section here in Wichita, KS only shows N/A or sales price unavailable.  I will try again with Zillow.  I appreciate the feedback.

@Stephen Burtin here in Wichita you can use recently sold data on the county website to find comparables. Search through the Sedgwick county website and you’ll be able to find both recently sold and the current appraised value the county does taxes on as well as work done where permits were pulled.

Howdy @Jason Howell

The reality is you can not find sufficient comps to use and complete the analysis all within 15 minutes.  If you are using a website like Zillow to find properties to analyze use the sold comps it provides.  Make few adjustments and use the average.

What your initially doing is identifying possible properties to evaluate in more detail.  I would concentrate on some simple criteria to weed out properties.  Such as does the current asking price and monthly rental income meet the 1% rule.  Then will it cash flow a minimum of $100 per unit using 50% for expenses.  If it meets both set that one aside to dig deeper.  If not move to the next property.

The ones you identify to dig a little deeper on are when you develop better comps and spend more than 15 minutes analyzing.

Originally posted by @Larry T.:

@Jason Howell ARVs or comps is a bit of an art.  Even realtors will vary.  For your purposes, I would think that a rough guess would be fine.  Those 15 minutes tell you if you want to take a close look at the property, where you'd really try to nail down numbers as close as possible.

Here's how I do ARVs.  Ideally, you will be able to find recently (last 6 months, or even the last few weeks) sold properties (at least three) that are as identical in features (style, beds, baths, square footage, lot size, condition) in the same neighborhood as your subject property.  Then is it simple.  The subject property should should be right in the range of those properties.

But in reality, This almost never the case.  So the trick is in making allowances.  Maybe yours is a 1 bath, and all the others are 1.5 bath.  Then find another group of houses that have both 1 bath and 1.5 bath houses, that are identical to yours in every way, except maybe they have a two car garages, where yours has a one car garage, and are otherwise identical to each other.  You might notice that that the ones with an extra half bath sold for $8k more, on average, than the ones with one bath.  Now go back to your house and your three or more comps that all have 1.5 baths, take the average and subtract $8k.

This is still a pretty simple scenario.  In truth, your subject property will probably vary in a number of ways from the comps, so you need to calculate these allowances for each one of those differences.  Maybe in addition to this .5 bath difference there is also a 100sqft difference, maybe also 2-car wide driveway vs a 1-car wide driveway.  Maybe a pool vs no pool, etc.  Calculate an allowance, up and down for each one of them.  That's how I get my ARVs.

 Awesome information, really appreciate you taking the time to spell this out for me! I'm definitely understanding that I should probably be a bit looser on this detail in the early stages... and open up to more detailed analysis once I know it passes the first level of tests.

But I will say that doing this deal analysis each morning has been SUPER educational. I'm starting to really get a nice point by point comparison of what each number means in a contextual sense. I understood in broad strokes before. Now I'm starting to have an immediate reaction when a deal might be ok or not at all. I suppose that's the goal of this exercise!

Originally posted by @John Leavelle :

Howdy @Jason Howell

The reality is you can not find sufficient comps to use and complete the analysis all within 15 minutes.  If you are using a website like Zillow to find properties to analyze use the sold comps it provides.  Make few adjustments and use the average.

What your initially doing is identifying possible properties to evaluate in more detail.  I would concentrate on some simple criteria to weed out properties.  Such as does the current asking price and monthly rental income meet the 1% rule.  Then will it cash flow a minimum of $100 per unit using 50% for expenses.  If it meets both set that one aside to dig deeper.  If not move to the next property.

The ones you identify to dig a little deeper on are when you develop better comps and spend more than 15 minutes analyzing.

This speaks volumes to me, thank you. I'll definitely remind myself that at this stage, I shouldn't be killing myself trying to find just the right number to drop in for ARV. Maybe in the beginning, I match the ARV to whatever the acquisition cost is and if it passes the test there, then dive deeper on a true ARV calculation. Saves time that way for sure. It's easy to get into the weeds when I overthink it. And then it takes way longer than the 15 minute target.

But I'm learning a ton! Its my early morning ritual at the moment (thanks to Miracle Morning).

@Jason Howell

Right.  You need to find what works best for you.

 When I first started a few years ago I did a 30 day challenge.  Analysis 30 properties in 30 days.  I started a blog on it and posted my results for all to see.  There were some Experienced BP members that said I was wasting my time.  That I was stuck in “Analysis Paralysis “.  I should be getting out on the street finding properties and putting in offers.  But, I stuck to my way.  I did not have the time to do what they were saying.  I work 60 - 70 hours a week at a W2 job.

Many others (mostly newbies like me) appreciated my posting.  It helped them learn as well.  I wanted to develop a quick conservative method of weeding out properties so I wasn’t wasting my time.  Doing the challenge helped ingrain the basics of analyzing properties.

At the end of the challenge I started submitting offers on some of the properties that met my criteria.  All were rejected not surprisingly.  However, one Sellers Agent came to us with another deal.  A 2 for 1 distressed property buy.  I bought both.  They in turn lead me to a third property.  One of them was a Duplex on a little over an acre lot.  I am in the process of adding additional buildings to it.

My point is keep analyzing until the proper calculations are second nature.  Find a good investor friendly realtor to help fine tune the numbers.  Then jump in —- the waters fine.

Originally posted by @John Leavelle :

@Jason Howell

Right.  You need to find what works best for you.

 When I first started a few years ago I did a 30 day challenge.  Analysis 30 properties in 30 days.  I started a blog on it and posted my results for all to see.  There were some Experienced BP members that said I was wasting my time.  That I was stuck in “Analysis Paralysis “.  I should be getting out on the street finding properties and putting in offers.  But, I stuck to my way.  I did not have the time to do what they were saying.  I work 60 - 70 hours a week at a W2 job.

Many others (mostly newbies like me) appreciated my posting.  It helped them learn as well.  I wanted to develop a quick conservative method of weeding out properties so I wasn’t wasting my time.  Doing the challenge helped ingrain the basics of analyzing properties.

At the end of the challenge I started submitting offers on some of the properties that met my criteria.  All were rejected not surprisingly.  However, one Sellers Agent came to us with another deal.  A 2 for 1 distressed property buy.  I bought both.  They in turn lead me to a third property.  One of them was a Duplex on a little over an acre lot.  I am in the process of adding additional buildings to it.

My point is keep analyzing until the proper calculations are second nature.  Find a good investor friendly realtor to help fine tune the numbers.  Then jump in —- the waters fine.

While I can understand the "analysis paralysis" point... My hope is to, like you say, convert certain pieces of the process from exercise to actual knowledge and understanding at a deeper level. I know for me, that only comes via repetition. Had you already picked a location prior to starting your 30 days? I find I'm jumping between markets, both out of curiousity and in an attempt to be exposed to the norms of many different areas.

I already have four properties in Indianapolis and in the end, might simply opt to stay in that market since I know it at least marginally better than other random markets I'm researching. But it's all for education. There will be an action point, this will prep me for that.

Thank you!!

@Jared Viernes once again you have helped me out without realizing! Thank you for insight in the local Wichita Market. Being an out of state (really of out country) investor I find it difficult to find key information without having boots on the ground. 

@Jason Howell I wish there were a way to select just a portion when you click the Quote button, but since there isn't, I'll just include here what you said above:

Now I'm starting to have an immediate reaction when a deal might be ok or not at all. I suppose that's the goal of this exercise!

This is exactly it!  I used to play a lot of pool (billiards) when I was young.  When deciding on your shot, a handy trick as a novice is to line up as if you are going to hit your target ball directly.  That is where you want the cue ball to strike the target ball.  As I became more experienced, I didn't need to do this.  I had developed an instinct for it.  I knew exactly where to aim.  More than that, of all the shots I could choose to attempt, I could quickly select the surest one that would leave me in the best position.

This is what this exercise is doing for you.  You are developing an instinct.  In the competitive world real estate investing one of the most important things is to be able to recognize a deal and act quickly on it.  You are learning to recognize a dud right away and not waste another minute on it and to immediately recognize a potential deal and know it is worth closer attention.

Kudos!

@Jason Howell I'm going to assume that you are analyzing a BRRRR? If that's the case here's how I simplify things. Initially, I dont care about ARV, because it has no direct impact on cashflow (which I'm assuming would be your main focus). My initial analysis is whether the rental income will he enough to cover the potential expenses. So if I have a house that generates $1500 per month in rent, and all expenses are $1200, the ARV wont change those numbers. Once I see that it has the potential to cashflow, THEN I will do some research to make sure that the ARV can support the refinance to get my cash back out. And to simplify it even more.... I know that in my area, because of high property taxes, the property has to exceed the 1.2% "rule". Monthly rent has to be at least 1.2% of purchase or I know I cant make it work. As you do more analysis you'll be able to streamline things, but when starting out, it's good practice to go through the entire process.
@Jason DiClemente 

Incredibly helpful! If I'm understanding, analyze based on cash flow first. That tells you whether it meets your requirements there and whether its worth your time diving deeper on the ARV to THEN see if it makes sense from a cash out refinance perspective. If so, PURSUE. :)

Thank you!!

@Jason Howell You can use Real Estate Valuation Websites such as Zillow, Realtor.com, or Trulia. Look at the RECENTLY SOLD PROPERTIES having similar layouts (number of bedrooms and bathrooms) that are within a reasonable radius, of the Subject Property.

As an example, you find three RECENTLY SOLD PROPERTIES having similar layouts that are within a reasonable radius, of the Subject Property. For each of the three RECENTLY SOLD PROPERTIES, divide the Sales Price by the Total Square Footage, of Living Space. This will give you a price per square foot. Next, you add all three numbers and divide by three. Take this number and multiple it by the Total Square Footage, of Living Space, of the Subject Property. This will give you a good guesstimate, of the ARV, for the Subject Property.

For example purposes, you have found three RECENTLY SOLD PROPERTIES, added all three numbers and divided by three resulting in: $119 per square foot, $122 per square foot, and $126 per square foot. The average of the three is $122.33 per square foot. The Subject Property has 1,809 of Total Square Footage, of Living Space. The ARV would be: $122.33 per square foot x 1,809 square feet = $221,301 (Estimated ARV For Subject Property).

Having more/ less bedrooms or bathrooms, as well as extra amenities such a pool will effect Sales Price as will the quality of schools and the Neighborhood Crime Rate.

The method I detailed above is the best way to guesstimate ARV, when you are not able to acquire a CMA (Comprehensive Market Analysis) Report, from a Realtor. I hope this helps you and others.

Originally posted by @Thomas Franklin :

The method I detailed above is the best way to guesstimate ARV, when you are not able to acquire a CMA (Comprehensive Market Analysis) Report, from a Realtor. I hope this helps you and others.

 Incredibly helpful!! And more than that, makes perfect sense. It's like I understood this process, but having it spelled out like this sets my mind at ease a bit more. I'll make this part of my workflow so I can master it over these next few months.

Man, I love learning this stuff. THANK YOU.

@Jason Howell if you're flipping or doing BRRRR, ARV is the most important figure to get right. See if you can find an agent in the market that you can develop a relationship with and run comps for you. Then make sure you really understand how to evaluate and compare comps. I can't stress that enough.