How to Use Comps to Calculate an Accurate ARV

Watch this video to see how to use the ARV calculator to quickly estimate the After Repair Value (ARV) of your property based on comparables in the area.

00:00 - Introduction

In this video we’ll be using the ARV calculator to get an accurate after repair value (ARV) using a combination of comps from Zillow and Redfin. While the best comps will always come from the MLS, this combo can be an excellent start before you engage with a realtor.

The purpose of this calculator, is not to provide you with comps; it’s to help you adjust them, to get to an accurate ARV, one that is going to be much closer to a true appraisal of value, because the tool guides you in using the same standard appraisal techniques that an appraiser is going to use, when you try to sell your property.

The cardinal rule of real estate investing, is to never let anyone tell you what a property is worth. 99% of people telling you the value of a property have a direct conflict of interest with you when they’re trying to get you to buy it. I’m not saying that everyone is a crook, but you need to be looking out for #1, so trust but verify your numbers. The best way to be sure of your numbers, is to be an expert at running them, and that is what this tool is going to help you do.

So let’s get into it.

01:07 - Tool Overview

The tool is comprised of 2 tabs, the comp search tab, and the adjustments tab.

The comps tab, is where you will search for and select the properties that will comprise your appraisal. Getting the right comps is really important and is a good first step, but this is where most investors stop, and leave money on the table.

The adjustments tab is where all of the power is. When you use the adjustments tab, this is as close as you’re going to get to how an appraiser is going to look at a property, and it’s going to get you that much closer to it’s true market value.

But first let’s talk about the comps tab, because if you don’t select the right comps in the first place, your adjustments aren’t going to mean very much.

01:57 - Comps Tab Overview

The comps tab is split into 3 sections: the subject property area, the map, and the list of comps.

The subject property area shows you the basics of the property, the ARV based on an average of the selected comps, and the final adjusted ARV which gives you the true market value of the property.

02:17 - An Aside on Comp Validity

The map is really important to help you determine the validity of your comps. One of the most important criteria for selecting comps, is the proximity of the comp to your subject property. In many cities, neighbohoods can change from street to street, and a comp just outside of neighborhood lines, or just across the street, can skew your valuation significantly.

It’s not always obvious where neighborhood lines are, but you can use rules of thumb that include larger arterial roads, parks, train tracks, and water courses.

So as you see here, our neighborhood is roughly delineated by these 2 roads, and a golf course on the other side.

Down below we have the comps area. You can select and deselect comps from the map, and that will also rerun the ARV calculations, so you can immediately see, how adding or removing a property will affect your average and adjusted ARVs. You can also delete comps if they are completely wrong and you know that you won’t be using them.

When you do a search, we provide you suggestions from Zillow. Zillow’s coverage varies greatly by area, and you should use these suggestions, only as a starting point. The best way to get comps is through your agent using the MLS, but in a pinch, if you have Redfin in your area, you can often get away with just using these 2 resources, and that’s what we’ll do today.

So let’s start back over here, clear this search and do a new search for our target subject property.

03:45 - Example Property

We found this place for auction on Zillow, and want to evaluate if it’s going to be a good deal.

The foreclosure estimate is 365K, which Zillow says is about 27K below its estimate of value. It’s looking pretty awesome so far. So let’s dig deeper.

We’re going to do a search for the property in the subject property address box, and immediately we get the subject property data prefilled, and some Zillow comps suggested for us.

It’s crucial that the subject property information is filled in as it’s required for the arv calculations, so if Zillow doesn’t have the data for the subject property bedrooms and bathrooms, and square footage, then you should go ahead and Google for that information to see if you can find it elsewhere.

For the comps, like I said before, you should use these suggestions just a starting point, and this tool works best when you have comps from your realtor, or from other reliable sources of recent sales data like Redfin.

04:29 - Suggested Comps Evaluation

So let’s look at the map and comps list for a second, and do some evaluation. The subject property is indicated by the red pin, and the comps are the blue houses surrounding it.

You can see that the comps appear to be inside of the neighborhood boundaries, so that’s great, but a few of them appear to be more than 3-6 months old. It’s late august 2016 right now, and you can see that we have a couple from October of 2015, so automatically we know to deselect those for now.

When we deselect them, the blue houses disappear from the map and our ARVs adjust accordingly. At this point, our ARV is around $403,000, which is close to that $27,000 margin over the foreclosure estimate that Zillow said the property is worth. But as we go along, we’ll see how their automated estimate falls down.

Looking at the remaining comps, we can see that one has 25% less square footage than our subject property, so let’s deselect that one as well for now.

At this point we don’t have enough comps to get an accurate measure of value, and we have to add some other ones. So let’s go to Redfin, and get some other sales from the neighborhood from within the last 3 months.

05:41 - Add Better Comps

Here’s a result of recent sales from Redfin, and you can see that now we can get comps that are even closer in proximity to the subject property than what Zillow suggested, which gives us an even more accurate measure of value. So let’s pick these four and add them to our comps.

We can add them to our comps by searching for their addresses in the additional search box at the bottom of the comps tab. This searchbox also uses Zillow data just like the top one, so that if you have coverage in your area, the property basics should prepopulate for you automatically. If they don’t, you can still copy that data from your other sources of comps, like we just found in Redfin, and enter it into the calculator.

06:24 - Adjustments Tab Overview

So now that we have added these properties, let’s select 4 or 5 and go to the adjustment tab. This is where the real power of the calculator comes in.

It is modeled after the Uniform Residential Appraisal Report form used by virtually every appraiser in the country, so that in the end you can be pretty sure that your numbers are going to be very similar, to what an appraiser is going to come up with, when you try to sell the property. Of course market conditions can change very quickly, and the appraiser may select different comps from you, but by following their process, you’re really going to mitigate as much of the risk of determining value, as you can control.

So let’s get back to it, and go over the sections of the adjustments tab that are going to help you in getting to the true value of your property.

Going across the top, we have the basic data for our subject property, and the comps that we selected on the comps search tab. You should have at least 3 or 4 comps selected, 4 is pretty good, and 5 will give you a really good indication of value. But you should make sure to have at least 3.

Any cell that you see that has an incomplete underline, is one which you can edit and adjust. So, say that you know that this property is actually 2600 square feet even, you can adjust it here. So if there’s anything missing from the automatic lookup, you have the ability to add it.

The bottom features section of this screen, is the most important part of the calculator, and that is: What are the features that you are going to be comparing your properties against?; and more importantly, what is the value of those features?

Getting this right is what is going to get you the absolutely most accurate determination value.

So let’s fill this out.

08:09 - Editing Features & Values

On the left side we have the features and their values in their neighboorhood.

The sheet starts off with basic features like lot size, bedrooms, and bathrooms, but you can add any number of features to compare against.

So say that view was an important consideration in this neighborhood. I know that these properties are in the foothills of the mountains, and 3 of them have a mountain view, and the other one doesn’t, so I can add that as a feature and assign it a value. Similarly for pools, or basements, or any other valuable feature that is different between your properties.

As far as what each feature is worth, values vary widely between markets, even between neighborhoods, so you will need to come up with your own data for the neighborhood that you are targeting.

If experience doesn’t tell you what those values are, one trick is to use the tool itself to come up with 3 comps that are exactly the same, and one comp that is missing that feature, and then you would be able to check for the difference in value.

If you don’t have enough comps to determine market value of a particular feature, then another way is to use construction cost as your base cost.

If you’re still not sure, you should share your adjustment with your realtor, or your investment community, and ask them for a second opinion on the value of the features in that neighborhood.

So let’s look at an example of filling these in.

In this neighborhood, I know that land values are worth about $210,000 per acre, so let’s use that as the lot size feature value. As you can see, changing the value adjusted the first comparable by about $5,000 by subtracting the differences in lot sizes multiplied by their value per acre.

We do the same addition of values for bedroms, bathrooms, and any other features that we are comparing. Like I said before, the tool lists just the basic features to start with, and you can add as many of your own to get to the point where you are comparing apples to apples.

So for example I know that some of these properties have a pool, so let’s add that as a feature that’s worth $20,000.

10:20 - Adding Features

Clicking on "Add feature" pops out a dialog where you can specify the name and value of the feature in that neighborhood.

There’s also an input for Unit of Measure, which normally you would leave as 1, but for special cases just like with lot size, where it’s value is measured by acre, which is 43,560 square feet, you have the ability to set that.

But like I said, normally it’s just one, so we’re going to leave at the default

Clicking on "Add Feature" will add a row to the bottom of our features list, and now we can add those features to our subject and comparable properties to see how they will adjust value.

I know that my subject property does not have a pool, and this expensive property here does, so let’s add 1 for that feature, and we immediately see that there’s an adjustment of 20 thousand dollars for this property.

So now in the final row, we see how the total adjustments to the comparables affect their values, and ultimately come up with the adjusted ARV for our subject property, shown here.

So let’s go back to our comps selection tab to see how we made out.

11:29 - Summary

If you were to run comps like 99% of investors out there who don’t know any better, you would be using just the average of your closest comps, and you would have overshot the value of this property by $15,000.

As an investor, you make your money on the buy side. Unfortunately, you would have likely overpaid for it, and ended up losing that 15k right out of your pocket when you tried to sell the property. This tool just saved you from making a $15,000 mistake, and the more that you use it in your business, the more money you’re going to keep in your pocket.

If you like what you see, please let us know, please let your friends know, and if you need any help with the tool, please reach out to us by sending us a message either, using the chat widget at the bottom right of the tool or by emailing us.

Keep on saving your hard earned cash, so that you can invest it in building your dream.

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