Every investor needs to be able to determine the After Repair Value (ARV) as close as possible, prior to ordering an appraisal. In order for a property to be considered comparable to the subject property, it needs to meet certain criteria. I have put together a list of twelve criteria that will help you get as close as possible to the ARV.
Try to find at least three comps. Remember, one comp is not enough to determine the ARV in most cases. You need to find at least three in order to determine the ARV because this is how an appraiser is going to do it.
Stay within the major subdivision of the subject property. Try to find properties that are as close to the subject property as possible. Don’t travel over one mile or into other unrelated subdivisions to get sold comps, unless you absolutely have to do so.
Do not cross any major roads or highways. Sometimes crossing a major road, intersection, or highway, etc., can give you a false impression of what the value might be as one side may have higher values than the other side for similar properties. You may not understand why until you drive the area to see. Certainly, if you cannot find any comps (or enough comps) you may have to cross over to find some.
Stay within the tightest timeframe that you can. Start with comps that have sold in the last 90 days or less, and then incrementally expand your timeframe to one year if you cannot find enough data.
Find homes built in a similar time period. This means homes built in the 1920s and 1930s should not be compared to homes built in the 1980s. Find homes built around the same time period when looking for comparables, generally, plus or minus five years at the most.
Find homes with similar square footage. Plus or minus around 15% can be a good rule of thumb to follow to find enough data to utilize. So if the subject is 1500 square feet, select a range that goes from 1325 square feet to 1725 square feet.
Look for similar style homes and/or a similar builder. Tract neighborhoods are much easier to evaluate than an area with custom-built homes because many of the homes were built around the same time with very similar floor plans. You can have neighborhoods that have a mix of both. There are subdivisions and neighborhoods that have a combination of everything–older custom homes, newer custom homes, older tract homes, and newer tract homes. Be sure you are comparing the right ones when doing your evaluation!
Look for similar school districts. There are subdivisions that can cross school districts that are right next to one another with similar homes to the subject. However, one area sells much higher/lower than the other, and you cannot figure out why. Be sure to look at the school district because it can have a major impact in determining value.
Don’t just pick the highest sold comp(s). Many new investors like to go straight to the highest sold comp and use that to determine the value. Look for comps that are in similar condition as the subject is going to be once completed. When an appraiser is doing an appraisal like this, it is called a “subject to” appraisal, which means the value is subject to the underlying improvements that are listed in the actual appraisal document. Also, it takes at least three comps to determine the value and not just one (and certainly not the highest one).
Look for any external influences. This includes things like is the property on a busy street, does it back up to the commercial property, are there high tension power lines above the house, does it back to railroad tracks, is it across the street from a school, does it side to a four-lane through street? Any of these things can have a negative impact on the value. Of course, do not neglect any influences that can have a positive impact on the value such as backing to a golf course, a wooded lot, lake view, or nature preserve.
Look for any functional obsolescence. Things like walking into one bedroom to get to another bedroom (known as a deficiency), or $20,000 worth of appliances in a $90,000 house (known as super adequacy) are examples of obsolescence. This is something that you must take into consideration, and whether it is curable or incurable.
Subtract any seller concessions if they exist. If the seller gave the buyer $3,000 towards their closing costs, this will be reflected in the listing on MLS and needs to be deducted from the sales price of that particular comp.
That’s a lot of stuff, so be sure to review it again! Once you have all of this data, take the three best comps you have, and start comparing them to the subject a bit more. Keep narrowing it down based on the data above until you can determine yours after repair value (ARV). For example, if you have three sold comps that are $145,000, $150,000, and $147,000, the value is probably going to be somewhere between $145,000 and $150,000. So if you go with $147,500 you are probably going to be extremely close to the ARV.
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Mike Hanna is a real estate investor, mentor, author, and public speaker. He has been an active real estate investor since 2002 in both single family and multi-family properties, and has been in the hard money business since 2005.