ARV stands for After Repair Value. It is the price that you believe you will sell the house once it is fixed up. Sounds simple. Get a hold of comps, speak with a realtor, plug it into your MAO formula with your repair estimate and voila – MAO.
But for every dollar too high your estimate, then every dollar too low is the profit.
WHAT TO USE AS AN ESTIMATE?
Do you use median price for a neighborhood? Do you use the adjusted highest price in a neighborhood? Do you base it on $/square foot?
Most investors determine their ARV’s based on very little actual analysis. The driving forces are normally related to the appraisals that asset-based/hard-money lenders order. The mentality is generally,”If the lender is comfortable with it, then so am I.”
Further, certain data providers have found that a “resource” for ARV’s that makes it easy to calculate also gives the right answer. Or, in the most obvious case of bias, an investor picks and chooses methods and comps to get the answer he wants based on his need to buy a house, or his lack of ability to manage another property, or his feeling about a subdivision.
Unfortunately, none of these methods have anything to do with how much profit an investor will make on a particular transaction.
Nobody has written a definitive book on the subject, and probably never will.
HOUSTON BUYERS’ FORMULA
We use a term that has become synonymous with the term ARV around our office for certain types of properties – MAV – Maximum Appraisal Value. After studying the variance between ARV calculations, appraisals and profits, we determined that the most consistent predictor of profit was not a hard-money lender ARV, nor a median sales price.
No, the most consistent predictor of the Net Sales Price (NSP) of a home and, thereby profit, was using the maximum value for which a house could appraise and multiplying that by a closing cost factor.
This method standardizes information and is used during the Sales process when selling a home. And, most importantly it gives the investor a basis by which to evaluate ALL investments consistently.
