Today, I want to show you the correct way to determine a home’s value!
Plus I will be showing you how to find the after repair value or “ARV”
How do you know what a home is worth? That’s the big question and a lot of new investors really struggle with this. Whether you’re just starting out or a veteran in this business you have to know
- What a home is worth
- What you can pay for a house and how much it will be worth once it’s all fixed up.
In this post, I will be reviewing the steps I go through every single day in my business to know what homes are worth and what I can pay for a house. So, take notes and start applying these techniques as you review properties.
What is After Repair Value Or ARV?
ARV stands for after repair value
. If your flipping a house this is the estimated amount you can get for it AFTER it has been fixed up. If your wholesaling it this is an estimate of what your cash buyer will be able to sell the home for after he/she repairs it.
You have to be able to estimate what the home is worth after repairs in order to know how much you should purchase it for. If you don’t know this info you could get burnt, and I don’t want that to happen to you. So learn this info!
A lot of new investors don’t know this information and they believe their house will be worth much more than what it really is. This could lead to them losing money and or not making as much money as they wanted to when they start.
That’s ARV now – how are home prices determined?
Home prices are determined by a comparative analysis of other similar homes around the property that have recently sold. In the industry, we call these comps. COMPS are an essential tool that shows us what other similar homes sold for in the general area of the home we are thinking about purchasing. We use comps to compare sold home prices. The best way to judge a home’s value is by comparing it to other similar recently sold homes in the same area.
Imagine if you were in the market for a new T.V… You’d probably start by comparing prices of the t.v you like.
If one store is selling that model for $200 more than then another your not going to pay an extra two hundred dollars for it. What this does is holds everyone accountable for their pricing. The same is true when it comes to real estate prices. Pricing is controlled by what other similar properties are selling for, in a general area.
So how do we go about getting these prices?
The best way to look for comparative homes is to see if you can access to the MLS or have a real estate agent send you all of the sold listings that are similar to the house you’re interested in putting under contract. If you can’t access the MLS or don’t have a realtor that can send you these records you a website like Zillow or Redfin to pull similar homes that have sold in the area.
Important: When looking this information up I don’t want you to look at listed houses or pending houses! It’s very important that you ONLY look at the houses that have sold
. As you know people inflate their prices when they are trying to sell their house. Just because they list it at a certain price does not mean that they are going to get that amount. So, always remember to only look at the SOLD prices.
Here’s what you want to do….
Pull sold home records from the last six months. I don’t like to go much older than that because you know prices change and fluctuate all the time. Staying in this six month period will give you much more accurate data. If you go back two years the pricing will be way different because as we know the market fluctuates!
When you’re looking up your comps you want to look up homes in the same neighborhood or area as the home you are looking to put under contract that has sold in the last 6 months!
Next, I want you to look at homes that are very similar bedrooms. This means homes that have the same amount of bedrooms, bathrooms, similar in age you don’t want to compare a home that was built in the 1800’s to one that is brand-new and then similar conditions. Lastly, homes that are similar sizes specifically other homes that are within 200 sq. ft of your prospected home. I want you to find 3 – 5 properties that are very similar to the house you are researching, using the criteria I have listed above.
NOTE: If you’re living in a rural area you might not be able to find that many but try to find at least 2-3 comparable homes.
Next, I want you to find the median or the average sold price of all your comparable homes. To make this simple let’s say that you find three houses which are very similar to the one you’re researching.
One sold for $100k, the second sold for $90k and the third sold for $110K. The median price of all these sold homes is $100,000. Proving that your subject property is close to being worth $100,000.
At this point it’s important to keep in mind here there are adjustments that you can apply. These adjustments are the reason why some homes sell for a little more or a little less than others. These aren’t huge adjustments may be a few thousand dollars. Let’s say that one of your comparable houses has a large yard or finished basement that might be why is sold for $110,000. Or if one house is in a little worst condition or on a busy road maybe that’s why it sold for 90K
So you can use these small adjustments to calculate your average price up or down slightly based on the items that might make the property more appealing or less appealing.
Once again – here’s what you should be doing to find these prices:
Homes that have SOLD in the last 6 months in the same neighborhood have the same bedrooms and bathrooms, similar square footage, similar age, and similar condition. Don’t look at the Zestimate or any of that bullshit I want you to really use your comps and sold price. Then make your small adjustments depending on the appeal of that adjustment.
That’s really it, this is the most accurate and best way how to determine a home’s value or the ARV of what the house will be worth after it has been fixed up.
If you have any question about these steps shoot me an email at Nick@NickEstes.Com.
P.S. I filmed a video explaining this process you can watch it here: http://bit.ly/FindingARV