028 What is ARV? And How To Get It Right

by | Jun 17, 2016 | Podcast | 0 comments

ARV stands for After Repaired Value and these days is one of the most common acronyms used in real estate investing.  This term is generally used by wholesalers and rehabbers to describe the intended value of a home after renovations are complete.

Too often in today’s market, unknowing buyers accept this number as factual information.  Inexperienced investors can get themselves in hot water by believing the ARV figure without doing their own research.

The true value of a property is that which the end user is willing to pay for it.

Consider the source (organized in descending order as it relates to accuracy of valuation):

Appraisers are usually licensed (in most states) and to be licensed they must undergo training to learn about the USPAP.  The Uniform Standards of Professional Appraisal Practice (USPAP) is the generally recognized ethical and performance standards for the appraisal profession in the United States.  A licensed appraiser is required to conform to the USPAP standards and has no financial interest or incentive to manipulate the valuation they provide.  An appraisal by a licensed appraiser is usually the only valuation model an institutional lender will accept.

Realtors are taught a more condensed version of the USPAP standards and should have access to the tools necessary to determine fair market value based purely on sold data of other homes.  Just because they have access to these tools, does not mean they are fully clear on how to use them.  Realtors are required to conform to the NAR (National Association of Realtors) standards of ethical conduct when providing an opinion of value.  Savvy agents know that they need to be conservative when providing valuation data to ensure the home purchase will pass the appraisal “litmus test” when the buyer is obtaining a mortgage.

Wholesalers are often an unlicensed individual who is not required to undergo any formal training in determining value.  A wholesaler has no ethical requirement in regard to advertising a home valuation to the public.  They are in the business of hustling houses, like Realtors, yet without any public accountability measures in place.  Most wholesalers seek cash buyers that will not elect to hire an appraiser.

Sellers can also have an opinion of value but after all….they have the most to gain from the sale of the home.  Does it make sense to believe what they say in regard to the value of their home.

Automated Valuation Models are everywhere.  (Zillow, Core Logic, Trulia, Redfin just to name a few) There are countless systems available to use computerized algorithms as a means to spit out home valuations.  The data is often flawed and inaccurate.  AVM valuations should never be relied upon as a sole means of determining value.

How to determine a home’s value

Know the neighborhood,  The buyer must have a clear understanding on the trends in the immediate area and the what the driving economic forces are in the area.  When determining value, the buyer must first consider homes that are “like kind” in nature.  Don’t use a 4 bedroom house when the property you are buying is a 2 bedroom.  The only exception here is if your house is the only two bedroom property in the area.

Know your customer, As an investor, you are certainly serving someone’s needs.  If you are the wholesaler, the rehabber or landlord is your customer (you need to leave some “meat on the bone”.  If rehabbing the house to flip, the end user buyer is your customer.  If you are a landlord, the tenant is your customer.  By taking the time to learn who your ideal customer is, you can determine the after repair value of the home more accurately.

Know your appraiser, if you hire an appraiser be sure to hire one that is local to the area your home is located in.  The appraiser should have experience in the immediate area and not be from a place far, far away.

Think about the factors that influence the home’s value.  Use comparable sales that closely match the subject property.  Pick comparables that have the same (or similar) architectural style whenever possible.  Lot size, building square footage, number of beds, baths and garages should all be a close match.  Another factor to consider is the distance of the comparable properties to your subject property.  Try to keep the distance apart to a minimum, the closer the better.

How to sell for more

Simply put, you get what you pay for.  Are you really equipped with the skills to sell it yourself?  Should you hire an agent to sell it for you?  To obtain the highest price possible, you need to attract as many potential buyers as possible.  If you hire a Realtor, don’t beat them up on their fee and then expect to get the best work out of them.  Instead, offer them compensation that inspires them to bring you top dollar offers.  Agents are (or should be) your partner in the transaction…by that I mean they should have incentives to bring you the best offers available.  Take the steps necessary to position the home in its best light, use a good looking professional sign if you sell yourself, or hire an agent that will market your property in the most effective ways possible.

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