How to Calculate Approximate Retail Value or After Rehab Value
I would like to address how to calculate a figure for ARV. 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 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, 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.