After Repair Value, or ARV, is one of the most important figures for an investor to know. Without calculating ARV, you'll have no way to tell if you've got yourself a good deal or just another money pit.
Determining the ARV is important for a couple reasons. Number one is purchase price. Number two is resale value. Let's talk about purchase price first. You come across a great piece of property for sale. It's not in the best of shape and you realize it will need some repairs before you sell it again. How do you know if the price is too much?
I start by looking at the comparable sales, also known as comps. If you happen to be in an area that is with the technological times, then you can go to the city or county website and search the real estate assessment records. From there, search for the property you are looking to buy. Once you find the property records, there should be a tab or area that references recent neighborhood sales. Compare the property you want to buy with these recently sold neighborhood properties to determine the ARV. Each recent neighborhood sales display usually shows you the date the property sold and for what price. Simply compare the bedroom and bathroom configuration, as well as the square footage, to find the recent sales price of similar properties.
You now have the recent sales prices of properties that are similar in size and configuration to the one you want to buy. But you have two more pieces to look at first. Always make sure that the comps you find have sold within the last six months to be safe. As you are aware, the market can change in such a way that home prices fluctuate greatly in a short time. You also want to make sure the comps are no more than a half-mile to a mile away, and preferably in the same neighborhood if possible. Again, I like to be conservative for safety's sake. Now that you have narrowed down your comps to similar size and configuration, that sold within the last six months and are within a half-mile to one mile; take the lowest recent sales price of the group and use that as your ARV.
Now that you have determined the ARV, you can reverse engineer the maximum allowable offer. Multiply your ARV by 0.65, or 65%. From there, subtract the repair costs, costs of buying/selling/holding, as well as your desired profit, to come up with the maximum allowable offer. Examples of your buying, selling, and holding costs would be stuff like title work, attorney's fees, closing costs, realtor's fees, title insurance, mortgage payments, taxes, and utilities from the time you own the property to start the repairs, until you sell it again.
For example, your comps provide you with a reasonable ARV of $150,000. Multiply $150,000 by 0.65 and we get $97,500. Estimated repairs are $15,000, buying/selling/holding costs $5,000, and we would like to make a $25,000 profit. Subtract the $15,000 repair cost, $5,000 buy/sell/hold costs, and the $25,000 profit from $97,500 and we arrive at $52,500. $52,500 is the maximum allowable offer that you should not go above. Pay any more than that and you might find yourself in financial trouble if your repairs go over budget or the house sells less for than your calculated ARV.
Len Costa is a real estate entrepreneur specializing in Wholesaling discount properties. He frequently hosts free training teleseminars and offers a variety of valuable real estate products, services and information. For High Profit Properties Well Below Market Value, visit http://www.MaverickWholesaleDeals.com to sign up. 2008 - All rights reserved.
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