ARV Is The Key To Any Deal
By Paul Esajian on January 3, 2014
There are many important calculations and numbers involved in every real estate transaction. However, there is none more important than the after repair value. This will be the number that affects everything else you do from what your offer price is to the budget of any repair work. How accurately you can estimate this number will determine your success as an investor. It should be established before you make any offers. If you work from the end of the deal to the beginning and come up with your ARV first, you will have a better chance to successfully see what the numbers need to be to make the deal work.
A deal is only good if you can sell it for a higher return on a future date. Simply getting an accepted offer at a low price without knowing its future value does not make it a good deal. If you can buy the house for $50,000, but you need $25,000 worth of work to only sell it for $79,900, it would not make a lot of sense. If you know the exit strategy and value before considering an offer, you will make better offers and focus on better deals.
The best way to come up with the ARV is with the help of your real estate agent. You can attempt to come up with the value on your own, but seeing how this number is so important, you should talk to a professional. Before asking them what they think, you could resell the property, as you should have an idea of what kind of work you will do and under the budget. In addition to your budget, you should know what kind of time-frame you will be working under.
Once you know this info, your realtor should be able to show you what has sold, for how much and how long. The goal is to find sales that are most like your subject property and compare those sales to yours. There may be properties that are similar, but it is almost impossible to find an exact match. Since buyers are always looking for the best deal, you need to base your comparables on what they will be looking at. Square footage, bedroom count, kitchens and kitchen appliances and sales price are the main factors that are used to compare properties. There will always be adjustments made with every property and value is largely subjective, but you need to put the time in and have a good idea of what you can do with the property before you make an offer.
The more realistic you are on your rehab budget and time-frame the better you can determine potential profit with the help of the ARV. There are many important pieces to the investing puzzle, but the ARV should give you a starting point and a finish line. If you do not know what you can sell for, how can you know what to offer?