Every neighborhood is different and believe it or not, there are even pocket markets inside segments of the same neighborhood sometimes.
It’s crucial to learn the neighborhood that you’ll be investing in- like the back of your hand; otherwise you increase the likelihood of costly mistakes or missing a good deal when it’s staring you right in the face.
It’s extremely important to establish the value of a property before you finalize your offer and your offer should be based on the amount it will sell for after your buyer makes the repairs.
Since you’ll be wholesaling, you’ll need to establish the wholesale price of that subject property.
While you’re out there networking and having investors complete your “profile sheet” to become part of your database- you have the opportunity to ask them what percentage they’d be willing to pay of the property’s market value in the neighborhoods that they prefer. There has to be enough profit for you and for your buyer to really make this a good deal and one that can actually close.
After some time, there will be certain areas where you will begin know right away, what the homes are worth. When you are new, that is not going to happen. So, don’t be afraid to accept an offer from a seller (verbal or written) and let them know that you are going to do some more homework but that you are interested in the house and will get back to them very soon. Initially, take a conservative approach while you gain experience using this strategy and for each unique market.
So, find the deal, get the comps, make the offer, get the house under contract, find a buyer, and close.
You should find the properties around the investment property that are comparable. The challenge is that more than likely, not all of them will be the exact same. In homes, look for houses with about the same number of rooms and features. Based on the values of these homes, which may be in certain states of repair, you can calculate the ARV value easily.
By studying the market, you’ll know what the real price should be. Often, it’s all about the location. The only way to determine the ARV is to look at comparable sales (commonly referred to as “comps”) for the area.
The first thing you want to look at is how far away they are from subject property, and how old they are. To increase your accuracy, use ½ mile radius and a 3 month time-line.
Next, drive by the comps. Compare them to the subject property you’re evaluating. Is the neighborhood, subdivision – or even the street – the same? For instance, if the subject house is on a street with several boarded up properties, and the houses that are inhabited are all run down; but the comp is on a beautiful street full of rehabs, then it is not an accurate comp.
The same is true for evaluating the house itself against the comp. Are they basically the same house? Obviously the comp is going to look great – it has probably already been rehabbed. That’s OK because you’re trying to figure out what the subject house will be worth AFTER rehab as well. But is the construction essentially the same?
The neighborhood. The area may look bad now, but are their plans for improvements? What is the crime rate? Has crime increased lately? On the other hand, has the neighborhood received any government grants to improve the area? Talk to neighbors, if possible.
What you want in a comp is similar size, similar number of bedrooms and baths, similar design, same frame or brick, etc. to what your home will look like after your buyer rehabs it.
Sometimes, there are no houses that are exactly like the one you’re evaluating. That doesn’t mean that you can’t use the comps at all. It just means that you have to make an ARV price adjustment. Think of yourself as the ultimate homeowner. How much of a price drop will it take for them to buy your house over the competition if your house is different? How significant is the difference? For instance, a house on a very busy street will require a significant price decrease to sell as compared to the houses on the interior streets of a subdivision.
There are several national companies to which you can subscribe that provide local sales data
SITEX: (www.SiteXData.com
REAL-COMP: www.real-comp.com
RealQuest: www.RealQuest.com
Home Radar : www.homeradar.com
DataQuick: www.dataquick.com
You can also ask a realtor to pull comps from the Multiple Listing Service (MLS). There may be a fairly wide range of prices. Throw out the extreme highs and the extreme lows. Focus on the price range where most houses sales are clustered.
The Comparable sales method is based on the recent sales prices of at least 3 properties within the same area that are comparable in size, amenities and features.
Check each property for:
- Sale Date
- Sale Price
- Sale Terms
- Age and Condition
- Quality of Construction
- Design, amenities and architectural style
- Square Footage
- Lot size and landscaping
You can take this one more step and look at trends. Look at all of the houses currently listed on the market. How long have they been on the market? Are they priced higher or lower than the ARV you’ve determined? If they are lower, it may mean that values are starting to drop. If they are all higher, then it means that the value is stable – maybe even increasing.
But do not raise your ARV based on “listed” properties. This
only provides you with trends versus what has actually SOLD! Better to leave your ARV alone
based on sales history, and be pleasantly surprised at the end of the project when it is worth more than anticipated.
The consequences of not knowing the ARV could be devastating to your career as an investor. The biggest consequence comes if your buyer feels that you misrepresented the value of the property in any way. For example, you tell your buyer that the ARV is a certain amount. The buyer fixes the property only to find there were other variables such as declining property values in the area. Do your homework before trying to sell the property.
With all of this work accomplished, you will KNOW the correct ARV.
Avoid Confusing As-Is Value with After-Repaired Value
The As-Is Value is the value of a property in its present physical condition and in the current real estate market. After-Repaired Value refers to the value of a property after it’s been repaired and placed in a marketable resale condition.
