With the recent influx of bank owned properties, there are a lot of new real estate investors looking to create their own ‘fix and flip’ business. We do rehab loans for these types of transactions, and while the time seems right for this type of business, it is very important to have some fundamentals in place to ensure you are working with a winning transaction. The core fundamental we are going to look at today is your after repair value.
An after repair value, or ARV, is the price you expect to be able to sell a property for once you have completed your rehab. If your after repair value is not accurate, chances are your profitability is going to suffer.
Having a great real estate agent working for you can help a lot in figuring out your after repair value. They should know the area well, and have a good pulse on the local market. In addition, they can likely put together a market analysis for you with comps that can give you a good idea of your after repair value. With that being said, however, this number is so very important to real estate investors that you should not rely on any single third party. Instead, you should also know how to do your own research.
To get a good after repair value estimate, you need to see what has sold in the area recently. The more recent the data is, the better. In today’s market, I would not use any comps that are over six months old. Less than 90 days is even better. In addition, for most properties you want the comparable sales to be nearby your subject property. Within a half mile is best, but looking up to a mile away sometimes is required.
Next, you should be comparing the size of the home and the bedroom/bathroom count. If possible, you should be comparing homes that have the same bedroom/bathroom count as your subject, and that are within 10-20% of the square footage of your subject property. This is not the lot size, but the actual living space square footage count.
Once you have a list of properties that have sold within these parameters, you need to do your research. The best way to do this is to actually drive these comps. Look at the neighborhoods, are they similar? Find out if these sales were private party sales or distressed sales. Is there HOA fees for some properties? Is there other factors that could impact value, for instance power lines, busy intersections, schools, etc? These are all important things to know, and not all of this information will come to light by simply looking at comps on paper.
Once you have driven the properties, you should have a good idea as to why each property sold for the price it did. This type of hands on valuation process is vital to choosing winning properties that you can make money on. Don’t shortcut this step!
Finally, once you have looked at all the above data, take a look at the days on market for the properties. How long are these properties sitting on the market before selling? If you have properties selling very quickly, say less than 30 days, that is a good indicator of a healthy market. If, however, you see properties sitting on the market for long periods of time, 6 months to a year, you may want to discuss the reasons for this with your agent.
Working closely with your agent is important in this business. Being able to rely on your agent, while also doing your own research, is going to give you the best combination of successful strategies to make sure you get it right!
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