Accurately estimating the After Repair Value (ARV) of a potential house flipping project is crucial to the outcome of your profitability as a property investor. Estimating too high or too low can leave you with a property that doesn’t move on the market.
Calculating ARV is a skill property and real estate investors should have and can be sharpened through practice and the right research.
Where to Start When Estimating ARV for a Property
The first step to calculating the ARV is to confirm the details of your potential property’s real estate listing. Pull up the tax records through your county tax office to confirm:
- Room count
- Year built
- Square footage
- Legal neighborhood
- School information
Find and Research Your Comps for a Solid ARV
Next, it’s pivotal to find and research comparable (comp) properties in order to calculate a solid ARV. The right research into comps can provide immense value when estimating ARV of a home.
5 Steps to Find Comps for an Investment Property:
- Start with the legal subdivision or neighborhood.
- Look for the following real estate listings: active, option pending, pending continue to show, pending, sold.
- Go back one full year with an emphasis on the last six months.
- Focus almost completely on ‘sold.’ If you can find a rehabbed sale, that is almost always your best comp.
- Print the HAR Comparative Market Analysis (CMA) report, if you have access.
5 Steps to Narrow Down the Best Comps for a Rehab Property:
- Start with the three highest sales and go down from there.
- Make sure the year built and lot size are comparable.
- Check that square footage, room count and construction type are similar to your potential property.
- Check if it has a pool and be consistent.
- Compare curb appeal.
Go the extra mile with this tip: Drive by your comp properties and your investment property to compare the surroundings. Look at the surrounding neighborhood, the homes next door, the streetscape and surrounding traffic, businesses and noise.
You Found Good Comps, Now What to Check?
Give your comp a home condition rating of 1-10 to help you estimate your potential property’s renovation needs and costs. Determine a home’s condition rating by evaluating:
- Kitchen countertops, appliances and cabinets
- Bathrooms, specifically look for granite, tub surrounds and stand-up showers
- An overall fresh interior
Calculating an Accurate ARV for an Investment Property
The key to calculating an accurate ARV is to do the appropriate research first and have those numbers in hand before you make an offer. Calculate your ARV by:
- Estimating a property value using your top 3-4 comps chosen from the thorough research listed above.
- Calculating the sold price per square foot and using this number when making adjustments.
- Determining if you plan to rehab at a level equal to your comps. Use your home condition rating. Make adjustments accordingly.
- Also make adjustments if your property is bigger or smaller than your comps.
When you’re ready to make an offer on a property investment opportunity, remember the 70% rule of thumb: “Pay 70% (or less) of the ARV of the property minus the repairs needed.”
If you can capture an investment property below the 70% rule, you are on your way to a very profitable investment opportunity.
If you have any doubts about your abilities, don’t hesitate to contact your hard money lender for some help — we are experts in real estate investing and have been doing this for many years!
Catalyst Funding is a hard money lender who can help build your real estate investment opportunities. With a background in fix and flip projects and other property investments, we can provide resources and guidance to help you through the entire process. We strive to be more than a lender! For more information, contact Catalyst Funding online or call us at (832) 648-3626.