Monday, February 17, 2014

How to Determine the After Repaired Value (ARV) of a Real Estate Property

As buyers of a real estate property we want to get an indication of its resale value before we make an offer to the seller. Whether you use an appraiser, a realtor or you make your own determination, there are key guidelines that you need to follow. Otherwise, your comparable value will mislead you into paying too much or selling for too little.

The following are the parameters that are generally accepted for using comparable properties to determine value of another property:

1. Similar sold properties that are not just under contract but have actually sold and closed. These similar properties are based on the living square footage of the property plus or minus 10 percent of this area. For example, a 2,000 square foot home could be compared with both a 2,200 and a 1,800 square foot property.

2 The number of bedrooms and bathrooms should be the same as the target property; if the comparables do not have the same number of bedrooms and baths, an appropriate adjustment should be made (i.e., as a general guideline, + /- $10,000 per bedroom).

3. These comparable properties should be within a ½ mile radius of the target property. If there are no closed sales within this area, the investor must move out to ¾ and finally a one mile radius. The preferred radius for lenders is ¼ mile of the same neighborhood or subdivision, but sometimes this is impractical.

4. Condition of the property is critical and can only be determined by seeing the target property and the closed sale properties. What the structure is made of is also very important and can be determined by the information in the public records or seeing the property. Driving by the closed properties can be helpful and may even spot other deals for an investor.

5. Neighborhood boundary lines cannot be crossed or higher or lower comps will be brought into the equation and could mislead the investor.

6. Any single very high sale should be investigated to see why it is out of the realm of the other values (i.e. mortgage fraud). Likewise, very low sales should be investigated for short sales, deeds in lieu of foreclosure, tax deed sales or foreclosures.
Looking at all the above criteria and doing a comparison with the closed sales and the target property is the standard way of determining what the after repaired value should be for a specific property.

In addition to the above time-honored methods of getting comparables, I suggest you drive the neighborhood and call every listed and for sale by owner (FSBO) property and negotiate a purchase price. Your results will determine what your actual competition is when you go to sell your property.

These are the real world competitors for your buyers so you should get to know your competition. Explain to these sellers that you are a cash buyer and can close in15 days and then negotiate the best price you can. We often find great deals doing this especially when the property has been for sale over a year.