How to spike your ARV before you buy

The main reason fixes and investments investors lose money is that they make mistakes when estimating value after repair (ARV). Getting the correct repair value and estimate, or at least close, is essential to your success. Analyzing the numbers in a deal is easy, but finding the numbers to connect to your formula can be tricky. Here are five mistakes I see investors and real estate agents make when trying to nail their ARV.

Don’t adjust comps: It is well known that we value real estate from comparables or comps. Comps simply means comparable properties that have recently sold or are for sale. We also know that we want our compositions to be in the same area and the same size. But what if you can’t get something that is exactly like the house you are trying to value? Have you heard the term “apples to apples”? This is true in real estate. If you cannot compare an apple to an apple, you must adjust the composition to be an apple. Let me explain.

Let’s say you have a 1,200-square-foot home. You find a great composition, but it is 1,400 square feet. To use the 1,400 square foot offset, you will need to take the listed or sold price and adjust the number down to compensate for the larger house. Basically, the property in question is expected to sell for less because it is smaller in size.

The mistake is not adjusting the offsets and using a bigger house as value. However, the adjustments don’t stop at square footage. Common adjustments could be garage stalls, bathrooms, amenities, view, basements, and location, which can affect value.

Rental: I often hear that a standard for location would be within a quarter to a half mile of the property in question. I guess that’s okay, but my question would be, is this a radio we’re looking at? Most of the time, that is exactly what investors and brokers do. Take a half mile radius. The problem with that is that you could be generating builds in neighborhoods that are not similar. Sometimes crossing a river, railroad tracks, or major artery can completely change the appeal of the area. It’s much better to look at the map and try to stay in the same area or neighborhood, which could very well mean builds further apart than other options.

Other location-related errors are negative site influences. On busy roads, near liquor stores, in front of commercial spaces, on a lake or in front of a lake and the distance to public transportation can play a role. The last thing you want to do is try to value a home on a busy street and use only compilations within the neighborhood. Buyers will demand a better price due to the negative influence of the busy road. Knowing that you need to make a location adjustment is the biggest problem, but the problem is how much adjustment will you need? Well, that’s why property valuation is an art and not a science. You may be guessing a bit here, but here are two good ways to do it:

• Find a composition that was sold with a similar influence and use it as one of your compositions, even if it is a little older or more distant.
• If you can’t find a good competitor with a similar negative influence, try to find an older competitor with the influence (even several years old) and compare it to houses without that influence and see what the difference in price was when it was sold. Knowing how much discount was needed for the location in the past can help you guess what it will be like today.

Square footage adjustment: With the exception of newer developments where all houses are similar, using a price per square foot model is a mistake. I see real estate professionals, even those who have been in business for a while, find an average price per square foot in the area and multiply it by the square footage of the property in question. You may be lucky and close to precision on this, as long as the size of the subject property is very average and comparable to compositions, but it is more common to lose its value using this strategy. The actual adjustment for the size difference above ground will be closer to 1/4 to 1/6 of the average square foot price in the area. You can ask four different raters and get four different answers on how they came up with the fit to use by size. Normally I will use 1/5 of the average price per square foot in the immediate area, unless the average price per square foot is quite high then I will use 1/6. This is not a formula, it is just a quick way to get closer.

Let’s say you are in an average neighborhood and you use 1/5 to keep this simple. Going back to our example of the 1,200 square foot theme and the 1,400 square foot offset. If the average price per square foot in the area is approximately $ 140 and the compensation is selling for $ 200,000, I would adjust the sale price from $ 200,000 to $ 5,600 so that the adjusted value of my compensation is $ 194,400. Confused? Let’s look at the math. Starting with the average price per square foot in the area, I would divide it by 5. $ 140 PPS / 5 = $ 28 PPS. In our example, there is a size difference of 200 feet, so I multiply 200 by $ 28 and get $ 5,600. Since the compensation is larger than the subject, I would expect the subject to sell for less, so I rest the setting. $ 200,000 – $ 5,600 = $ 194,400. Remember, this is the value indicated using a comp. You’ll want to use multiple comps to get an even clearer picture of the value.

Finally, square footage above grade is much more valuable than below grade. Although you can double the finished square footage, you won’t get twice the value of the house. It is extremely rare for us to see a finished basement add enough value to cover even the cost of finishing it. I would call a few appraisers in your area to see what they fit for basements, both finished and unfinished, or inquire into comps with and without basements to try to find what a fit should be. In the markets we lend to, we will typically see $ 10-15 per foot for unfinished space and another $ 10- $ 15 per finished space.

Bedroom setting: This is an easy mistake to make, but in most cases, we don’t see a difference in bedroom values. A 4-bedroom home does not necessarily sell for more than a 3-bedroom home. If the houses are the same size and one has an additional bedroom, you are probably giving up something a buyer may want; like a formal dining room or a master suite, or it could just mean that all 4 bedrooms are small, while the 3-bedroom house has 3 spacious bedrooms. The attractiveness of the buyer is based on their needs, so it is unfair to say that a house is worth more just because it has an additional bedroom. Except in rare cases, we don’t see our appraisers adjusting the bedrooms. If a house is larger and has an additional bedroom, it is worth more. In that case, you’re capturing the increase in value in square footage, not bedroom count. If you adjusted an offset for size and bedrooms, you would be making two adjustments for one room.

Believe someone’s opinion: I just had a customer who lost $ 10,000 on a deal because he believed wholesalers’ opinion on value. They pressured him to make a large deposit at the site to secure the house and he didn’t have time to do his own research. Based on the comps provided by the seller, the deal worked. When he brought me the deal, I quickly saw errors in the comps that were provided. I showed you why the comp selection was flawed and how you would need to adjust the comps to get a more accurate value. A competition was twice the grade! The next day, my client went to the wholesaler armed with the information I provided and asked them to return the $ 10,000. The wholesaler denied the request and then word spread that Pine Financial is too conservative. My answer is that if you want a lender to finance bad deals, we are not your lender. I’d rather pass a deal than finance something my client will surely lose money on. Investors choose to work with us because it’s not about the deal, it’s about the relationship. We have no problem providing you with the advice you need to build a successful real estate investment business.