The first thing when flipping a house, is figuring out it’s value after improvements. In this post I’ll a look at how to find real estate comps and how to come up with an accurate After Repair Value (ARV).
In real estate, the cardinal rule is that you should never let anyone else tell you what a property is worth, which means that you need to know how to value every potential property that you find.
To help you learn how to do that, I’ll go over:
* What is ARV?
* What are real estate comparables (comps)?
* Sources of real estate comps
* Why you should never use a Zestimate or any other automated value?
* What are the steps to calculate ARV?
What is ARV?
An ARV is the Fair Market Value (FMV) that a property would sell for on the open market, after you have rehabbed it. The ARV is most often determined by using a Comparative Market Analysis (CMA for short.)
What are comps?
In real-estate terms, the principle of substitution states that: a buyer will pay no more for a property than the cost of an equally desirable (and comparable) alternative property.
Comps are thus those properties that have been recently sold, whose interior and exterior is similar to your potential property, and that are within the boundaries of the neighborhood of your property.
Sources of comps
The Multiple Listing Service, or MLS, is the best and most up-to-date source of sold listings. Access to the MLS is restricted to licensed professionals, so you will most likely need to request comps from the MLS through a real estate agent. That’s not always convenient, or possible, as you don’t want to bother your realtor for the hundreds of deals you might want to look at to see if they’re even deals.
Outside of the MLS, Zillow.com and Redfin.com are two of the largest property data aggregators available that can be searched and filtered for sold listings.
While Zillow is in every market, it’s data is mostly from public records, and as such the comps are only as up to date as the records are — often too old to accurately come up with current market values. It could take 6-12 months for a recording in public records. Zillow also provides brokers an ability to syndicate current open listings, however you should not use active listings for comps.
Redfin is an actual broker, and thus their data includes MLS data that is only slightly delayed. Unfortunately, Redfin is not available everywhere, and may not be available in your market.
Other options include government websites for the Office of the Assessor in your town or county that may or may not contain a search for sold properties. Title companies and appraisers can often provide comps as well.
What we use
Whereas the initial suggestions that REI/kit provides in the ARV calculator come from Zillow, Redfin is our recommended source for getting comps outside of the MLS.
You can export comps from either Redfin or the MLS into CSV format, and use the CSV import tool to import your comps into REI/kit.
Automated Valuation Methods:
Or why you should never use a Zestimate, Redfin estimate, Trulia estimate,… any automated estimate?
Appraisal is part science, part art. Part of that art is looking beyond bedrooms and bathrooms, and looking at the differences in features, and adjusting for quality of construction, functional deficiency. These are data points that are not available to automated value mechanisms, and require a certain level of human judgement.
I already talked about how Zillow’s data can be more than a year behind and is not useful in calculating current value.
So when you have incomplete data, and old data, there is no way that the machine will give you an accurate value. Similarly Trulia is owned by Zillow, and they use the same data to come up with their valuation. While Redfin’s data is more current and complete, they too suffer from not having the complete picture, and therefore cannot give you an accurate valuation.
The only way to get the best ARV is to calculate it yourself using standard appraisal techniques. You can use the REI/kit ARV Calculator to run those adjustments yourself for free, and get pretty close to how an appraiser would value the property, provided you choose the right comps and feature values.
What are the steps in the process of calculating ARV?
There are three steps to follow in order to calculate ARV using a comparable sales analysis.
1. Select the most appropriate comps using appraisal criteria
2. Adjust the comps to make them look like your property
3. Calculate ARV
Select the most appropriate comps using appraisal criteria
When finding appropriate comps, try to find properties that fit these criteria:
- have sold within the previous 3-6 months;
- are within the neighborhood geographic boundaries (*);
- have similar features;
- are approximately the same square footage;
- and are of similar construction and finishings
(*) Neighborhood boundaries are things such as waterways, large arterial roads, parks, and railroad crossings. It’s not good enough just to run comps that are in a 1 mile radius. Often the next street over is a completely different neighborhood with completely different home values.
Once you have a list of comps similar to the property, select only those three to five comps in the same condition that you think your property is going to end up in, which is freshly rehabbed and updated.
There is no guarantee you will be able to find comps that are like your property in every single way, so you will need to adjust the comps.
Adjust comps to make them look like your property
Adjusting comps is a three part process:
1: Assign dollar values to features
2: Adjust the feature values of a comp
3: Adjust the sales price of that comp up or down
You will need to assign a dollar value to the different features of your property and also of the comps. Features are bedrooms, bathrooms, garages, pools, views, and so on. It’s important for you to know how much a feature contributes to the value of a house. For example, a bedroom might contribute $10,000 in one neighborhood, vs $13,000 in another.
Every feature that your property has, or does not have, must be adjusted for in each comp. Multiply the value of a comp’s feature by the number of units of a feature it has. Conversely, apply a negative value if the comp has less than the number of units of a feature that your property has. So for example if your subject has 2 bedrooms and your comp has 4 bedrooms, then your feature value adjustment for bedrooms would be -(2beds X $10,000) = -$20,000
Increase or decrease the sold price of a comp upward or downward after adjusting for individual features.
- If your property and the comp have the same number of a feature, the adjusted value is 0.
- If your property has two units of a feature and the comp has one unit of that feature, the comp’s sold price is increased by that feature unit’s value.
- If your property has one unit of a feature and the comp has two units of that feature, the comp’s sold price is decreased by that feature unit’s value.
So for example if your subject had 2 beds and 2 baths, but your comp had 4 beds and 1 bath, then and a bedroom was worth $10,000 and a bathroom was worth $5,000, then your net adjustment to the comp would be:
-(2beds X $10,000) + (1bath X $5,000) = -$20,000+$5,000 = -$15,000
After you have adjusted the value of all three to five comps, calculate the ARV. To do this:
1. Take the value of each comp and divide it by its corresponding square footage. This will give you the adjusted price per square foot of each comp.
3. Add the final square footage values of all comps together.
4. Divide by the number of comps to get an averaged price per square foot. (*)
5. Multiply your property square footage by the averaged price per square foot.
(*) Averaging $/sqft is good enough for most scenarios, though technically an Appraiser will do a weighted average based on how much he feels the comp contributed to the $/sqft.
So that’s it. The trick in getting an accurate ARV is in selecting the right comps in the first place, and knowing the values of your most important comparable features. For the rest, you can use tools like our free ARV Calculator to do the adjustments for you.
What are some issues that you have come up when trying to get an accurate ARV?