I am a wholesaler and I came up with an ARV for a really crappy “ugly” house. I was using an ARV of $205K. When I contacted a person at Expresshomebuyers.com (they do rehabs) about my wholesale deal, he said the ARV was way too high. I told him I used comps from Zillow.com. I know their estimates are out in left field, but the comps are real recent sales data. The rep said, there are a few $140K figures. I said those are probably foreclosures or wholesale deals. I thought those weren’t used for the ARV, since I thought the ARV would be the maximum a home could sell for in excellent condition if sold to a retail buyer. Isn’t that who rehabbers sell to?
My wife had the same problem when she approached a rehabber/flipper concerning a wholesale property that we had under contract. Yes, you may have valid comps to calculate the ARV, however, you have to look at what investors are willing to pay for.
He said that true the house could go for that much if it were on a MLS system if you went through a realtlor, but how long is it going to sit on the market. We were advised to know and understand what investors are willing to pay for certain piece of property. We are learning this whole thing.
Comps can be very misleading, especially if you do not know your market really well.
There are areas in Tampa where you can easily find comps in the 180’s-200’s, when the actual ARV is much, much lower. There is still a lot of mortgage fraud going on, unfortunately, so a lot of those high comps are jacked-up and don’t reflect what properties in that area are really worth. The only way to learn stuff like this is to get out in the streets and become very, very familiar with what is going on.
When I was first getting started, I would always run my deals by more experienced investors to get their opinion before I put anything under contract. More often than not, they would tell me that my deal sucked, because I was basing my numbers on inflated comps because I didn’t know any better. After a lot of market study, and banging my head against the wall :banghead, now I know better.
Bottom line- learn your market inside and out, and things will become much easier. It takes a lot of work, but will pay off if you are willing to put forth the effort.
For what is worh, I had a fire damaged house in contract for 290,000 in CA. ARV was 465,000, this #'s are based on 6 months comps,when the tire hit the road I was told to forget the comps from 5,6 months ago and focused only on last 6 weeks, my ARV came down to about 350,000. Point of the story use comps only a month or two old.
With the huge decline in our national real estate market many parts of the country won’t allow for the use of comps that are more than a month old. In many cases I will instead use properties that are currently on the market along with previous comps. Current properties will be your competition at some point so I have found it helpful to check them against my comps.
What is the best way to do a market study? We look at lots of comps in the neighborhoods in our area. We also look at how much a house is going per sq foot. They we compare that to other homes in the area, as well as # of BR, Baths, style of home, etc.
What worked for me was to learn one neighborhood at a time. I would spend a week or so studying recent, sold, comps in a small area, then going and driving by the comps, and driving up and down the streets to see what was for sale, how much it was for sale for, etc. Also, I would call all of the “for rent” signs to see what the market rents were in the area, and also to see if the landlord was looking for more deals (I found one of my best buyers by doing this- he is about to buy house #5 from me).
You really need to get out and look at the comps, because sometimes, they don’t make sense on paper, but once you get out and look at them, you can see why one is selling for higher than another.
This all takes some time, but once you learn an area really well, it makes things so much easier.
My advice- start with small area, become an expert at it, and then find another one, and repeat the process.
Steph has told you all you need to know. Get out and learn the market, one neighborhood at a time. If someone were to tell you that they know of a property on X street in your farm area, and gives you the basic info (beds, baths, sqft, etc), you should be able to KNOW a fair ARV estimate off the top of your head. The comps, BPOs, appraisals, etc are just tools to COMFIRM your initial number.