The value of a house after repair is called the ARV (After Repair Value).
I often talk about taking baby steps to small advances and progress. That progress will build momentum and before you know it, you will be actively flipping houses.
One of your very first steps needs to be in the direction of finding a source for valid, recent comparable sales to use to determine the ARV. I will cover what comparable sales are exactly and where and how to obtain them later in this post.
WARNING: Getting a good source of comparable sales to determine the ARV of houses will take some work. If you expect to just click away to some website and have it do the work for you, you might as well just skip reading the rest of this post. It’s not a lot of work and once you have it, you will be set.
First, have you joined our private FlippingJunkie facebook group? Come network with us!
If you don’t know how much the house will be worth once it is fixed up, you’re dead in the water.
The importance of this is paramount. This is how you reduce your risk when flipping houses. You need to buy right (cheap) in order to reduce your risk to acceptable levels.
But, how cheap is cheap enough?
It would be great if you could just go around buying everything up for $1,000-$5,000. You would probably be safe in doing that but it’s VERY unlikely to happen often.
You need a formula to base your offers on. The only way to know this is to determine what the value of the house will be once fixed up, the ARV. This is used to determine your MAO (Maximum Allowable Offer).
The typical house flipping offer formula is as follows:
The maximum allowable offer for you to make is determined by calculating 70% of the after repair value and subtracting the cost of repairs to get it in a sellable condition. Yes, determining repair costs is also one of the directions you need to start taking baby steps in as well. In the beginning, it can be as simple as finding some contractors to walk through the house with you and give you an estimate. An experienced investor is probably even better.
Now this formula is not set in stone. I tend to shoot for 65% of ARV because I am at a point where I cherry-pick deals. Many investors will buy for slightly higher than 70% in higher price range houses that need little to no repairs.
But this formula is a good rule of thumb to start with. The more you network and talk with other local investors (preferably the highly seasoned ones), you will have a better idea of what formulas they use that work well where you are. A lot of it also depends upon their holding costs. If they are paying cash, they might be willing to pay more because they are not having to pay the higher interest rates that an investor using hard money or even private money might be paying.
Of course not. So you have to stick to keeping your offers below the calculated ARV. This will help ensure you make a profit (not guarantee, just do a pretty good job of helping to ensure).
The ARV is the cornerstone of the formula. If that is off, your MAO will be wrong and could invite much more risk than you should be willing to take.
It really doesn’t matter which exit strategy you plan on using. Whether you decide you want to wholesale the house by assigning the contract, fix and flip the house, rent the house, whatever the case may be, you should know what the value of the house is BEFORE you buy or even make that first offer.
When wholesaling, if you miscalculate the ARV too often, you will quickly lose all credibility and find it harder and harder to sell your deals to other investors.
Ok. I’m sure you understand how important it is to be able to calculate accurate ARVs. Now, let’s talk about how to do it.
You must look at comparable sales.
Comparable sales are houses that have SOLD RECENTLY that are SIMILAR to the subject property (the one you are determining the value for.
DO NOT base your numbers on houses that are currently for sale to determine a value. There might be some situations where you will not have enough comparable sales to determine the value of the house and will need to take into consideration the prices of houses currently for sale.
Anybody can ask anything for a house, what they end up actually getting for it is what we want to know and is what is used to determine the real value.
Where do we get these super amazing comps (comparable sales)? Great question. I was hoping someone would chime in with the answer.
Ok, I will answer it, but if you do (and I am sure some of you know of some other sources), please share them in the comments below.
The first place and only place that I get these comps is from the MLS (Multiple Listing Service) where houses that Realtors are selling are listed for sale. They have the most accurate and up-to-date data for houses that have sold.
The MLS is the source I recommend everybody work to get their comps from. There are some other sources, and I will talk about those shortly, but this one trumps them all and is the most accurate.
You have to be a real estate agent to get access to the MLS.
Bummer. I know. But all hope is not lost.
Before you run off and get your real estate agent license to get access to the MLS, consider just befriending an agent to get access to the data.
You have to provide something for them though. Don’t just expect agents to jump at the chance to do a lot of work for you with nothing in exchange. If you are doing a lot of motivated seller marketing, (which I highly recommend) you will end up with A LOT of leads that just do not fit our investment criteria. You can offer to recommend the agent to these sellers. They can then list the properties and make commissions from the sales.
In some areas, MLS access is allowed to be accessed by agent assistants. You will need to check with people locally to see if that is an option. You don’t need to be a licensed agent to be an assistant (hint hint).
There are other free sources of sold data but they tend to be inaccurate a lot of the time. This is especially true in non-disclosure states. These are states that do not make disclosure of the sold prices of houses public record. There are a lot of states that are non-disclosure states. They are as follows:
Notice that Texas is on there and I am in San Antonio. Many people will see this as a huge drawback and setback. I don’t. It just meant that I had no other option but to find a way to get comps from the MLS.
So if you are planning to invest in one of these states, be prepared to work at getting access to comps from the MLS. It’s not that hard. Most people just don’t want to put forth any effort though.
Don’t worry, those people won’t ever be your competition so it’s actually a benefit to those of us that do put forth the effort.
The free sites that provide sold data are probably many that you have heard of. A quick list of them is as follows:
There are also some paid sites that have accurate data for people in disclosure states. Some of them are as follows:
The issue in non-disclosure states with the values calculated by the free and paid websites is that they have to sort of ‘guestimate’ the values based on the recorded loan amounts (which is public record). This can lead to some wild values and some way under-valued values.
It becomes like a box of chocolates… you know the rest. 🙂
In order to get a list of truly comparable properties, you need to use certain criteria for the searches.
The criteria I use are as follows:
When going through the list of comparable sold houses you might find some that are on the extreme ends. These are usually houses that aren’t really similar. A house could be on the extreme low-end price wise because it needed a lot of repairs or had a meth lab. Some houses can be on the high end because they had something the others didn’t.
Usually, there will be a cluster of values that are all really close.
An example would be the following numbers:
Comp 1: Sold $111,000 (1006 square feet, 24 days on market)
Comp 2: Sold $138,000 (956 square feet, 36 days on market) – throw out
Comp 3: Sold $109,000 (980 square feet, 41 days on market)
Comp 4: Sold $75,000 (900 square feet, 180 days on market) – throw out
Comp 5: Sold $113,000 (1050 square feet, 15 days on market)
Comp 6: Sold $108,000 (1030 square feet, 33 days on market)
Based on these comps, and the subject property being 1040 square feet, I would say the after repair value (ARV) would be $110,000. That’s where they are clustered. Comps 2 and 4 should be thrown out because they are extremes. You might want to try to find out what made Comp 2 sell for that much and see if it can’t be done to the subject property.
Some people like to take the averages of the sold price per square foot. Using the example above the following average would be calculated as such:
Comp 1: price per sqft: $110/sqft
Comp 2: price per sqft: $144/sqft
Comp 3: price per sqft: $111/sqft
Comp 4: price per sqft: $83/sqft
Comp 5: price per sqft: $108/sqft
Comp 6: price per sqft: $105/sqft
Average Price Per Sqft: $110/sqft
Value of houses based on average (subject property at 1040sf): $114,400
This is quite a bit higher than I estimated with taking out the extremes.
Without the extremes, the average price per sqft would be: $108/sqft and the value would be: $112,320. I’m conservative so I would go with the lower number of $112,000 or even the $110,000 as mentioned earlier.
CAUTION: When using the average price per square foot make sure that the sold houses are a similar size to the subject property because the price per sqft changes dramatically if some of the houses are much bigger. The much larger houses don’t usually sell for the same price per square foot. It is usually lower.
Determining values based on comps is really more of an art than a science. There are so many little differences to most houses and it can be very subjective. You will get better at it over time and start to get a ‘gut feel’ for what the value should be.
I know people that invest in small towns without any decent comps and they just know what the values are. If you pick a ‘farm area’ to focus on, you will also become an expert on the typical values.
Drive by and look at the comps you’ve found and use to determine the value. Sometimes you will notice something that will have affected the value and you need to know before you go on thinking that the subject’s property is similar when the houses are not.
This doesn’t take long to do. Don’t skip this step.
Now that you know how to determine the comps once you get them, you will need to figure out where to get them.
Start calling around to local real estate agent offices and ask if they have any agents that work with real estate investors. Just talk to them and let them know what you are trying to do.
You might fumble through the first several calls, but who cares? Those first calls will help you to do better on the next calls. Those next calls could end up making you a long term business relationship that helps you to flip houses without much risk because you are able to determine values accurately.
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Thanks for visiting,
Great Post as always.
Just want to add that I am a certified appraiser in Illinois and this is exactly how I would go about finding my comparables for an appraisal. All my comps are taken from the mls, unless there are really slim pickings, or its a new subdivision, then I get info from the builder or go to the local assessor. FYI ..The assessor is usually behind a couple of months.
Thanks again for the post Danny
Glad to have your input.
Awesome post Danny! I enjoy reading your experiences because of how simple and straightforward you make everything to the new investor.
Question: I am looking to purchase a friends house in Illinois on owner financing and was looking to find the ARV. How would you rate a typical real estate brokers price opinion vs. an appraiser’s comparables when considering price accuracy at time of the sale? Also, would an appraiser be able to give an appraisal of projected ARV with a specific scope of work?
Great questions. The BPO and appraiser’s comps should both roughly be equal (they should both be using roughly the same comps). I’ve never had an appraiser give a projected ARV with certain work being done but I’m sure they could.
Hey Danny – nice detailed post here, very helpful.
Have you ever encountered a property where there were truly ZERO comps to be found? Surprisingly, I run into this quandary quite often with vacant land properties in rural areas (I’m guessing it’s because there is such a lack of movement in areas with lower populations… the data just isn’t there). It creates a bit of a challenge, given how important it is to understand a property’s value.
I know it’s probably less common with the types of properties you deal with, but how would you go about determining an ARV if comps were really, truly unavailable? Would this cause you to pass on the deal altogether?
Great question and I have actually come across situations where there aren’t good comps for a property. Actually, just this week it happened.
Got a lead for a 3,000+ sqft house with an inground pool in an area where all other houses were right around 1000sf. In addition, it wasn’t really a good retail sell area (mostly rentals). In these situations, I just figure out a number that makes it so that I cannot lose. Yes, sort of a wild-ass guess, but one slanted to low end to eliminate most risk. It really depends on the situation and at least a little knowledge of an area. But, there are certain prices that make it hard to lose even if you have to end up just renting it out. Low ball!
I’ve heard of a lot of investors that will offer 50% or less of the county value when there aren’t any good comps.
very detailed and well explained article on a very important topic..
Thanks for sharing!
didn’t know you were in SA.. Will be moving there from the east coast in two months.. Looking forward on crushing the competition over there..
Just be sure to not crush me… 🙂 Game on.
Thanks for this post. It is exactly what I was looking for. My wife recently got agent access (on her way to become a realtor) and I have been trying to figure out how to get great comps on the properties using it. Now to get some leads and make some money!
thanks again for everything!
No problem. Glad to help, Craig.
Danyy, this is SO good I’m going to use it to train a couple of new agents that I want to work with. Thank you for soooo much detail. You are awesome!
Best of success to you,
Glad you are getting a lot of value from it.
Say I’m in a state (NY) that is a disclosure state, could using paid comp sites work? Would they have info that is fairly close or spot on to the MLS or is MLS the only way to go regardless?
Also, if that doesn’t work, chatting up realty areas in my area (it’s Queens so there are plenty) do I just state I’m looking to wholesale properties and if I come across ones that don’t factor for me, I’ll pass them on to you? That’s my understanding of what you were saying when you stated the ones that don’t work.
I think MLS is always the best source. No matter what I would spend time trying to get access. Until you do, you can use the other sources and just be conservative.
You statements about what to say to them is correct. In some places they allow assistants to access the MLS. If you build a relationship with them you can become an assistant and get access.
Hey Danny, this is a great article thanks for taking the time to write it up. I have a question sort of similar to Seth. If your subject property has weak comps 6 months back, but you can find great comparables 9 months back, will you use them to assist you in estimating ARV even if they are a bit older?
If you use older comps like in this example, 9 months, I suppose one thing to take into account is has the market overall improved/worsened since then. If the market has worsened you will have to adjust your comps and be more conservative.
Does that sound like a good approach? Thanks again for the great post Danny, take care.
That sounds like a great approach, Samantha.
If the comps are older, be more conservative. Taking into account whether the market has improved or declined, should help a lot. If there are not a lot of houses for sale that is a good sign. If there are a lot of houses for sale but few comps recently, not such a good sign.
Thanks for the reply Danny. I was also wondering, will you go across roads to other subdivision when looking at comps if there are not enough comps in the same subdivision as your subject property?
For instance sometimes I go .5 a mile out, and there are very few comps in the subject properties immediate subdivision. But across the street, in a different subdivision there are some good comps. Before the appointment I will go ahead and make sure to drive the comps to make sure that I am comparing apples to apples. This way I can make sure the housing product is similar even if the subdivisions are different.
Is that a good approach in your opinion? Thanks again for your input. Love your site.
What you are doing should be fine as long as you are being honest about whether they are apples to apples. I would look at typical prices for the other area and the days on market to see if similar to the few available in the subject area.