Quickly (and Accurately) Estimating ARV

A fellow BP’er reached out asking how to determine ARV when making an offer. Since estimating ARV is an art more than a science, I figured I’d share the approach I’ve developed over the years.

I’ve been pulling comps since I started building my rental portfolio using the BRRRR strategy in 2015 (read more about BRRRR here), and I frequently pull comps for my owners as a Property Manager. I’m going to share the simple process I’ve refined over the years for pulling comps and determining ARV. Using this process, I have successfully estimated ARV accurately on all but one property - not too shabby!

Remember, there is more than one way to skin a cat. I’m going to share the process that works best for me when pulling comps, but it surely isn’t the only way.

The best process isn’t going to yield an accurate answer without reliable data. At the time of this writing only the MLS (unfortunately) has the best sales data. Zillow, Trulia, etc. are working on improving their systems but they are far from robust right now.

Simply logon to your local MLS, navigate to where you pull comps, and follow the steps below:

1. 1. Filter for just the subdivisions around the subject property, not crossing any major roadways (usually there’s a drawing tool that helps). If you start crossing major roadways, housing prices can vary dramatically.
2. 2. Filter the age of the home +- 5 years (example: if the home was built in 1995 then search 1990-2000). Properties that were built in the same timeframe usually have the same finishes and floor plans.
4. 3. Filter the square footage +- 20% (example: if the house is 2000sf then search 1600-2400sf). Smaller homes usually sell at a higher price/SF than larger homes, so we want to ensure the homes are similar in size.
6. 4. Filter for pool or no pool.
8. 5. Filter for Solds in the last year or 360 days.
9. 6. Select the properties that have the same finishes as the subject house (i.e. if the subject house has been updated with hardwood and granite. Then select properties that have been updated with hardwood and granite, and eliminate properties with formica, carpet, etc.) OR if you’re going to rehab the property, then select the finishes the property WILL have after the rehab
10.   a. If there are more than 15 properties that match the criteria, then:
11.      i. Filter for the exact number of bedrooms and bathrooms
12.     ii. If there are still more than 15 properties, then reduce the time frame to 6 months or 180 days.
13.   iii. If there are still more than 15 properties, then filter by subdivision.
14.   iv. If there are still more than 15 properties, move on to the next step.
15.   b. If there are less than 5 properties that match the criteria, then:
16.      i. Increase the SF up to +-30%
17.     ii. If there are still less than 5 properties, increase the age of the property to plus or minus 10 years.
18.    iii. If there are still less than 5 properties, increase the shape area.
19.   iv. If there are still less than 5 properties, move on to the next step.
20. 7. You should have at least 3 solid SOLD comps to run the comparative market analysis (CMA).
    
21. 8. Take the Median SOLD value in $/SF and multiply it by the SF of the property to get the estimated market value or ARV.
    

Example: You complete the eight steps above when evaluating a 2,000-SF SFR and end up with the following comps:

Property - Sold Price/SF

123 Main St. - $109/SF

456 Elm St. - $110/SF

789 Oak St. - $115/SF

1011 Maple St. - $120/SF

1213 Smith St. - $145/SF

The median SOLD price/SF is $115. The property you are evaluating is 2,000-SF so multiply 2,000-SF by $115/SF to get $230,000.

Note: if you take the average of the above then you’ll end up with $120/SF, resulting in a value of $240,000. This may seem like a minor difference but with larger properties, or when you have drastic outliers, your ARV can be way off, which is why we use the median. Another way to think of it is the average vs median net worth if Bill Gates walks into a room of people.

Whether you start using the entire process above or take just a few nuggets, I hope this assists you in determining a more accurate market value or ARV. It has definitely helped me!

Happy investing!