Determining ARV with Real Estate Investments

As I stated in my last post about formulas, I would address how to calculate a figure for ARV in a post of it’s own. Simply put, ARV, to a real estate investor, means Approximate Retail Value or After Rehab Value.

ARV is one of the most important values to the real estate investor in calculating profit. It is extremely important for this figure to be realistic and formulated for the market in which the property will be sold.

“The market in which the property will be sold”. Remember that sentence. Write it down. Unfortunately, when calculating ARV, many real estate investors and real estate agents don’t put enough weight on that statement.

The way most investors and agents calculate ARV is by looking at the most recent sold properties in the area, adjusting for square footage, lot size and improvements and coming up with a number. That’s great and that is how most appraised values are factored. But, the ARV is not what the value was in the past, it is what a buyer will be willing to pay for the property in the future.

So, what are we supposed to do to arrive at THAT figure? Look into a crystal ball? Have our palms read by a psychic?

Realistically, it’s not that difficult. Accurately arriving at ARV just involves taking into account a few more factors. Let’s look at some:

- What is currently on the market? Competition drives down real estate prices so if there is a lot of inventory for buyers to choose from in your price range, you will need to be priced better than the competition in order to compete.

- What is the season? Seriously. I can tell you for a fact that in a particular neighborhood near the beach in Virginia Beach, real estate prices drop every year by 7-12% when it gets cold outside. Look at the seasonal trends for the neighborhood in which you are selling. Does a large employer hire during a certain time every year? Are there seasonal “snowbirds” flocking to your area?

- Where are mortgage interest rates and what is the forecast for the rates?

- Existing/upcoming barriers or future features. For example: (barriers) road construction, pending government legislation, next-door neighbor’s lack of exterior maintenance, (features) new recreation center, new elementary school, county utilities being installed.

- What is the current time on market for properties? If the average market time is 6 months, you will need to consider setting your ARV lower if you want to sell in less time.

- Remember to factor in any customary seller-paid buyer concessions.

- Perception. This has become more important as buyers have turned more and more to the internet for their real estate information. What value does the city/county have the property assessed? What is the Zestimate® for the property on Zillow.com? While these figures don’t necessarily reflect true value, sellers need to be aware of these figures and understand that buyers are looking at them.

What factors influence the ARV in your area? Keep a list and refer to it when making your calculations.

Wolkia.com

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tina@wolkia.com