Numbers hold the key to any successful rehab deal. The more accurate you are with your estimates, the higher your profits will be. One of the most important numbers you will estimate is the after repair value (ARV). This is the value that you think the property will be worth after you are done with your repairs and upgrades. If you overestimate this number, your property will sit on the market for a very long time. The best investors can walk into a property and within minutes assign a value based on their knowledge of the market. If you are not at that point yet, here are a few tips to help in the process:
1. Get a Good Team in Place: Real estate investing requires a solid team around you. Even though you are the final decision maker, you should lean on the input of others. Your realtor and contractor are the two key team members that will help determine your ARV. This number starts with an estimation of the work needed and the costs associated. Even if you are a seasoned investor, a contractor will have a better idea of all the costs. Little things on rehab deals can quickly add up. Not everything that you do will give you equal value. A good contractor knows the best ways to stretch your dollar. Your realtor will tell you if your numbers are realistic. You don’t have to do everything yourself on your rehab. Start with getting a good team in place.
2. Review Multiple Estimates: If you have a solid relationship with a contractor, you are ahead of the game. Getting to this point usually takes time and several deals. If you don’t have a contractor on your team, you need to get a few different estimates. As a rule of thumb, you should nail down three good contractors and go from there. Once you go over three contractors, everyone will sound alike, and you will end up doing more harm than good. Be as open and honest with them as possible. Explain the deal and what you are looking for. Ask for written estimates detailing all the costs and work associated. This way you can compare apples to apples with other estimates. Price is important, but it may not be the most important thing. You want someone that will be at the house when they say they will. The longer it takes to finish the work the more your bottom line is reduced. After reviewing your estimates it will give you a good idea of your budget and an idea of the finished product. The finished product will lead to your value.
3. Know Your Market: Before you do any work it is important that you know your market. Knowledge of the market will give you a good idea of what work you should do. Not all improvements you do make sense for the neighborhood. Improvements in San Diego will differ from those in Birmingham. All buyers like nice things, but the market may not give you the return you are looking for. A pool that takes up half of the back yard may not be the best idea. You want to make your upgrades and finishes nice, but you need to make them in line with your market. A real estate agent will help narrow down a specific value. You need to have a basic idea of the neighborhood before you even make an offer. The market the property is located in is more important than the work you put in. If you don’t know your market, you will have a tough time determining the value.
4. Listen to Your Realtor: Even though you may have a good grasp of the market, your realtor has a better understand of local property values. Getting estimates and knowing your market is all done to determine the value. There is a lot that goes into this number. Going off of one sale a few streets over will not give you an accurate value. Your real estate agent will look at comparable sales that are similar to your property. They will look at past sales and current listings in the last 90 days within a mile of your property. This is the information that the people that will buy the property look at. You may do great work, but the numbers don’t lie. Your real estate agent will give you an honest assessment of where they think the value will be. In most cases, they will be right. If you ignore their advice and lean towards the high side of the market, you will end up disappointed.
With any ARV estimate, you should be conservative in your approach. You may hit the high side of the market, but there is always the chance that you don’t. If you aren’t satisfied with the profits by selling at a lower ARV number, the deal may not be for you. Your ARV is the number where profits are made. Everything else you do is unimportant unless you can sell for the price you expect. Take time before you make any offer and look at the right numbers. If you have a good team in place, you need to listen to their expertise. Estimating the ARV is the most important piece of the rehab puzzle.