How To Get ARV (After Repair Value) With No Comps
Member since 2022 · 2 posts · 0 votes
What is the best way to find the ARV when you literally have no comparable properties close to the property that you are looking to make a deal out of? For example, I am looking at a house that is 1,800 sq. ft but every property close to that one is 1,400 sq ft or lower. Is this still a deal that I can put under contract, or should I stop evaluating this property and look elsewhere?
You're only off by 400 square feet. If the rest is comparable (beds, baths, etc), if the neighborhood is the same, you make the allowance by breaking it down to price per square ft, then multiply by square feet of the subject. If you need to make some adjustments for any of the afore mentioned factors, do so then. But no....I wouldn't drop something because I can't find a comp.
I know a number of appraisers who use a method of choosing comps in similar neighborhoods if they cannot find anything nearby, using the year build, etc. When all is said and done, the number you working towards,value, while you want it to be accurate, is somewhat subjective. Determining what value someone places on a thing by knowing what someone else paid near by is not an exact science. 400 square feet is an issue if the number of beds are different, or going from sub 1000sqft or over 2300 sqft or so (in my area).
Be as conservative as you can, don't inflate, don't lie to yourself or others.
Do your research based on Zip Codes. Appraisers will look heavily into price per square foot if there are no comps in the direct area they expand outwards and make their own assumptions based on what data is available.
Potentially you could get an appraiser to appraise the property current/improved state so you can see what you are working with. Should only cost a couple hundred bucks to get the answer you are looking for. If the property isn't worth that keep looking.
You're only off by 400 square feet. If the rest is comparable (beds, baths, etc), if the neighborhood is the same, you make the allowance by breaking it down to price per square ft, then multiply by square feet of the subject. If you need to make some adjustments for any of the afore mentioned factors, do so then. But no....I wouldn't drop something because I can't find a comp.
I know a number of appraisers who use a method of choosing comps in similar neighborhoods if they cannot find anything nearby, using the year build, etc. When all is said and done, the number you working towards,value, while you want it to be accurate, is somewhat subjective. Determining what value someone places on a thing by knowing what someone else paid near by is not an exact science. 400 square feet is an issue if the number of beds are different, or going from sub 1000sqft or over 2300 sqft or so (in my area).
Be as conservative as you can, don't inflate, don't lie to yourself or others.
It's a loaded question without having an actual property to comp
Where does that extra 400 square feet come from? Was it a patio, carport or garage that was enclosed? Or is it a more custom house that's all original square footage? A house that was built that way typically flows better and the square footage is going to be laid out better than a house that was originally 1400 square feet that had a big space enclosed. That extra space / "bonus room" isn't going to be as desirable
Can you find some comparable sized comps if you go just a bit further out? Try .75 miles instead of .5 miles for example
You can look at price/square foot too but this will not be a direct comparison. If remodeled 1400 square feet houses are going for $250/sq ft or $350k, having an extra 400 square feet does not necessarily mean the subject property will go for $450k. Especially if it's an enclosed area like above. It may only go for $370k or $380k. An appraiser once told me if it's "fluff" square footage like above he only gives about 20% of the price/square foot for the value. So in this case that would be only $20k extra or $370k
At the end of the day you just have to make your best judgement. It doesn't mean you just can't offer on the house. But don't go calling yourself $100k more than anything in the neighborhood has sold for either. ARV / appraisals or just opinions of value, nothing more. Be conservative when all else fails
In the absence of good comps in a neighborhood, you should first ask, why?
* Are there (or have there been ) any recent listings in the neighborhood, or are properties sitting on the market for a long time and not selling (or cancelled/expired listings)?
This should give you a clue as to the desirability (demand) for the neighborhood or area.
....you may find there are ample sales in adjacent neighborhoods, but lingering active listings (or cancelled/expired listings), in the Subject neighborhood. This may point to the Subject being in a less desirable neighborhood, or may simply be due to owners holding on to their houses in the neighborhood and little are offered for sale.
or
Are the recent sales in the neighborhood , only 1,400sf ?
...and if so, is that because an 1,800sf house is overbuilt for the neighborhood?
or .....is it just that 1,800sf houses are more desirable and less offered for sale?
....maybe an 1,800sf house is highly desirable in the area, but their have not been any available for sale recently.
In reality, an 1,800sf house does not sound overbuilt for most neighborhoods, but this can be the case in larger gla's (example. 3,000sf house, in a neighborhood with mainly 1,400sf houses).
Over the years, I have had properties offered to me that were significantly larger than what is typical for an area, with the Seller/s trying to push how much better those properties were, due to the superior gla. But, for me, that just contributed to more risk, since there are typically less buyers for the "atypical" house in a neighborhood. I typically want to have the typical house (in primary characteristics) in a neighborhood, for a relatively low price and then make it superior in condition and quality.
And, contrary to some opinions, an appraiser, or should I say, a Good appraiser, will not look at it on a $/sf basis, especially not prior to adjusting for other factors. Example - A run-down, unmaintained 1,000sf house, with no pool and located on a high traffic street, should not be worth the same as a fully remodeled 1,000sf house with twice the lot size and a pool, etc.
I suppose you can look at $/sf on a more general basis for an area (assuming you have many datapoints), but then you still want to take into account the Subject size vs the typical size for the area. Because, if you are overbuilt for the neighborhood, then the surplus gla will have less value/sf than the typical gla. So, if you are an 1,800sf house in an area of 1,400sf houses, the 400sf additional sf, may be worth less than the first 1,400sf. And you would be overvaluing the 1,800sf by just doing a basic $/sf calculation, without taking that into account. ..... Makes sense?
Ok, this might be more info than you wanted ...but it is important.
Here are some other techniques to follow to help evaluate a property with little local data.
You should look at it from multiple sides:
* Look at historical sales (go back years if you need to) and see if properties in the neighborhood typically sell fast, and note their gla's (1,400 or 1,800sf, etc), and get a feel for the Subject's value at that time. Then you can "trend" the appreciation of the market from that time, to estimate what the appreciation rate may have been from then till now. So, if you think 3 years ago the value should $100k and you estimate 10% appreciation, you may decide the current value may be around $110k.
* Also, look at adjacent neighborhoods. Find recent sales of similar properties in similar neighborhoods. That should give you a fair indication of value for the Subject. If you can't find any, then use relatively similar neighborhoods to find sales and adjust for their sizes, year built, etc.
Basically, you should be taking multiple factors into account in the areas you are finding recent sales
* Is that neighborhood similar to the Subject, similar demand and appeal?
* Are homes of similar characteristics to the Subject neighborhood (i.e. size, year built, bed/bath count, quality, condition, lot size, etc).
In general, you are looking for recent data of similar properties, and if you can't find similar properties, you find the best data you can and try and take any differences into account (location, size, etc). For example, if you only have recent sales in a superior neighborhood, where homes sell for 10% higher than the Subject's neighborhood, then you estimate the value of your house and adjust it down by 10% for being in an inferior neighborhood. and you can do the same for any characteristic (superior or inferior). That's actually how a good appraiser should be doing it. And yes, you may use $/sf, but just keep in mind the potential pitfalls of that and price that in to your estimate.
Also, to be clear, I am a 25 year certified Appraiser, Investor and Broker
Delete