Tag Archives: wholesaling

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.

Why Buy Real Estate From a Wholesaler?

wholesale-process

By definition, supply chain is the process by which a person or company (wholesaler) buys products from a factory (source) in large quantities at highly discounted prices and then sells the products to another person or company (distributor) for a profit. The distributor adds value to the products and then sells the final products to end consumers (retail buyers). This process represents the steps that it takes to get the products from the source all the way down to the retail buyer. Most businesses follow a similar process, and real estate is no exception.

In real estate a distributor is the equivalent to a rehabber who typically sources its products from a real estate wholesaler. One could argue that the rehabber would benefit from buying properties directly from the source,  he (she) would save the monies that the wholesaler would otherwise realize as profit, and there is nothing wrong with doing that.

Real estate wholesaling, however,  is a full time business that requires dedication and money. Its core activities include: marketing for deals, determining market values, estimating repair costs, negotiating, contracting,  marketing for buyers, getting deals closed. All of these activities must be done consistently day in and day out for the wholesaler to have sufficient deals in the pipeline for the business to be profitable.

Let us take a closer look at some of these activities:

Marketing

Marketing for deals is the foundation of a real estate wholesaling business and doing it in a continual basis is a must. The success of a wholesaler depends largely on the effectiveness of his marketing.  Although there are numerous marketing strategies, some of the most common and effective strategies include:

  1. a) Direct Mailing: This activity entails mailing out letters consistently to targeted prospects in hopes that those motivated to sell will respond. It requires hundreds or thousands of letters to be mailed regularly.
  2. b) Cold Calling: This activity involves calling a list of targeted prospects and asking to buy their houses, it is time consuming, and it requires calling a large number of prospects for it to be effective.
  3. c) Bandit Signs: This activity requires driving around a targeted area and planting signs in strategic places prompting for motivated home sellers to respond.

All of these activities require proper and consistent follow up since it takes, on average, 7-10 interactions with a prospect before he (she) would commit to sell.

Negotiating

Real estate is a people business and dealing with people requires a unique set of skills. Getting good deals requires good negotiating skills, but getting great deals requires developing abilities to best understand people and their needs. Wholesalers have the opportunity to enhance their negotiating abilities on every call they make or on every visit to see a prospect.

When negotiating the purchase of properties, savvy wholesalers keep rehabbers in mind, they understand that the deals need to  make sense not only to them (wholesalers), but most importantly, the deals need to leave enough room to profit the rehabbers who will be taking bigger risks.

Closing Deals

Once a deal has been negotiated and price and terms have been agreed upon with the seller, contracting the deal is the next step. Writing up contracts requires skills, it needs to include the proper language to protect the interests of all involved: the seller, the wholesaler and the ultimate buyer, the rehabber. Once contracting is done, these are sent to a title company for title work to begin. Anything can happen at this point that can kill a deal, and the wholesaler needs to follow up closely in order to help resolve any issues that may pop up.

Indeed, real estate wholesaling does require dedication and expertise in different areas, and we all know that developing expertise takes time.

Expertise in these areas alone, however, does not make a business profitable. To increase profitability, businesses must eliminate inefficiencies by focusing on their core processes. Activities that do not correspond to the nature of a business eat away resources that negatively affect its bottom line.

Real estate rehabbing businesses that source their own deals may think that bypassing the wholesaler to pay less for deals will increase their profits. The opposite is true long term. The time that rehabbers spend finding their own deals could be spent managing their rehabbing projects in order to deliver them on budget and on schedule. Also, focusing on their core activities allows rehabbers to do more projects in a same period of time.

For those real estate rehabbers looking for great deals, add a few wholesalers to your team. They are not your competition, they provide a service that adds value to your business. Savvy rehabbers understand the value of wholesalers, they typically work with more than one and that helps to keep the rehabbers busy. Treat real estate wholesalers as your partners and you will see your business grow.