Tag Archives: After Repair Value

What is the ARV of a Property and How is it Calculated?

arv-calculation

After Repair Value (ARV) is the market value of a property once all repairs have been done and the property is in move-in condition. If you are a wholesaler, a rehabber, an end-user, if you are any kind of buyer or seller, you need to know the ARV of the property you are buying or selling.  The ARV is a valuable piece of information, it is the point of reference (ceiling) used for properly pricing a property.

But, the ARV is useful only if it is a meaningful value, if it is calculated correctly. So, how is the ARV calculated, where does the information needed to calculate it come from, and how to get access to the information?

Calculation

You are probably familiar with how ARV is calculated, you are just not aware of it.  When buying a consumer product, for instance,  is it not common to check that it is reasonably priced before committing to a purchase? Yes, most of us do that. We compare prices with similar products from different brands to make sure we are getting a good deal.

Residential real estate is valued the same way, by comparing prices with similar, recently sold properties. These similar properties are referred to as comparables (or comps for short).

Comparables should be as similar to the subject property as possible. The typical comparable guidelines to follow are:

  • Property Type: Comparable must be the same type (single family detached, townhouse, duplex, etc.) as the subject property.
  • Distance: Comparable must be located within a mile radius from the subject property, half a mile is desirable for a more accurate valuation.
  • Square Footage: Comparable living area square footage must be within 10 % of the subject property.
  • Bedroom / Bathroom Count: Comparable bedroom and bathroom count must be within one of the subject property.
  • Age: Comparable age must be within 10 years of the subject property.
  • Sales Date: Comparable sale date must be within the past six months.
  • Number of Comparables: At least three comparables are required, but as many as six are desirable for a more accurate valuation.

The purpose of these guidelines is to ensure that the comparables are as similar to the subject property as possible for the valuation to be accurate. In most cases, a good estimate of the value of a property is all that is needed to make a wise investment decision, and following these guidelines will suffice.

Professional appraisers, however, take the valuation process a step further for more accuracy. They understand that not every subject property has at least three perfect comparables that meet the guidelines. In such cases, they take the values of the most similar comparables available and make adjustments (positive or negative) to bring their values closer to that of the subject property.

For instance, if a subject property has a pool, but the available comparable does not, then a monetary adjustment (in this case, a positive adjustment) is applied to the value of the comparable to compensate for the value of the pool. The value of the pool is determined by finding matched paired sales in the subject area (one with a pool, and the other one without it) and then finding the difference between their sold values. So, if a property with a pool sold for $230,000, and a similar property without a pool sold for $210,000, an appraiser can infer that the market in the subject area is paying $20,000 for a pool.

The same analogy is used to adjust comparables for bedroom and bathroom counts, living area square footage, etc.

Once the comparables are found, the ARV is calculated by taking the median of the available comparables. The median is the value in the middle of a list of ordered values, it is not the average value. It is important to understand the difference.

For instance, if a list of comparable values include the following:

  • Comp 1: $525,000
  • Comp 2: $230,000
  • Comp 3: $225,000
  • Comp 4: $220,000
  • Comp 5: $75,000

Then, the median is the value of Comp 3, it is a more accurate value than the average ($255,000). Notice that the values of comparable 1 and comparable 5 are not consistent with the values of the remaining comparables. The value of comparable 1 is abnormally high, this could be an indication of a fraudulent transaction. Similar inconsistency occurs with comparable 5 which value is abnormally low, this could indicate a cash transaction from an investor for a rehabbing project.

Taking the median of a list of comparable values will disregard any inconsistent values (high or low) and will provide a more accurate and meaningful valuation.

Source of Information

There are two sources of information to collect comparable data from:

  1. County Public Records: Every real estate transaction that takes place nationwide gets recorded in its corresponding county public record system. Detail information about the property, purchase price, owner information, tax assessments, liens, etc. , get recorded in the system. Some states, however, do not require that all information about the property be recorded . Texas, for instance, does not require that purchase price be recorded. Also, it is common to find inaccuracies in the public records, and the likelihood of these getting corrected is slim.
  2. MLS: The Multiple Listing Service are private databases created and maintained by real estate professionals (realtors ®) The databases are exclusively shared among real estate brokers nationwide to gather information about properties listed for sale (properties sold off-market are not included in the databases). The information in the system is highly accurate. The real estate professionals who share the information ensure that its accuracy is maintained since the quality of their service depends on it.

Tools

There are a number of free sites available online that provide comparable information. The most commonly known are Zillow, Trulia and Redfin.

Zillow and Trulia are media companies which gather their data mostly from public records.  These sites are known, however, for their inaccuracies in calculating home market values. But, since we are doing our own valuations, Zillow and Trulia are still good tools for providing comparable information.

Redfin, on the other hand, is a real estate brokerage with presence all across the United States. Redfin gathers its data from both the MLS and the public records, hence, they provide the most up to date and accurate information.

Following the guidelines outlined above will allow you to select the most meaningful comparables provided by any of these sites in order to obtain accurate After Repair Values.