FMV vs ARV

For the clarification. It makes sense now.

Max

It's easy to get them confused, but it's also costly.

Something else to consider when looking at these 2 values. Most people I talk with think that if they put so much money into a property, that's much it will go up in value after the repairs are done. this is typically not the case. A great person to check with is an appraisor. Example: years ago when vynl fence companies first came out part of their sales pitch was that this 10k fence would raise the value of your home. This is true to a point. If you talk to an appraisor though they will tell you that a fence is a fence and may offer 2500.00 for it whether it is made of vynl or cedar, etc.

Also something to take into consideration is to be careful not to over rehab a house. Many times I see houses over build in neighborhoods. When selling time comes, average price per square foot for the neighborhood will determine the selling price. Amenities will help, but not too much.

McMansions or mansionization does not justify the price if the house does not conform with the neighborhood.

Novice question, but isn't FMV, by definition, the price the seller should be looking for?
What's the basis/justification of offering 30+ % less? Cash deal and
fast close? Should offers be calculated based on FMV or ARV?

Thanks.

I actually thought the two were one and the same! Thanks for clarifying!

FMV is determined by comparing Comps of sold homes in the neighborhood/area. So when evaluating a target house, I would determine what I think is the FMV as if the house needs no repairs.

My offer is determined by repairs needed and profit required.

So shouldn't the ARV be = to or close to the FMV used?

I have seen Birdogs, flippers, wholesalers advertise houses such as (Just useing exaggerated numbers)

3/2 house
FMV $100,000.00
Repairs needed $25,000.00
ARV $150,000.00
Flip for $75,000.00

Maybe I am wrong, but how can a house needing repair have a higher ARV then the FMV?

Hey Robert,
look at the FMV as the before repair value. I understand what you are saying about the comps, but remember in order for your comps to be accurate the houses you compare yours to got to be as similar as possible. If the properties you use for your comps are all in mint condition you actually end up with the ARV for yours. In that case you subtract the repair cost from the comp result in order to get your FMV.
I sure hope this makes as much sense to you as it does to me!
Thomas

It is possible to have a
FMV of $100,000.00
Buy it for $ 90,000.00
Repairs of $ 30,000.00
ARV of $150,000.00

Who is going to buy a house for $150K in a neighborhood where a 3/2 houses sell for $100K?

I just do not understand yet.

thanks for all advice,believe it or not i finally get it..thank you everyone

In this example you have a house that is needing $30k in repairs. Before it is repaired it is worth less than after it is repaired. The value on this one in its rough condition is only $100k (Fair Mkt Value), because houses that are in this condition (rundown) in this neighborhood are selling for this price according to your comps.

After you repair it, it should sell for $150k because that is what people are paying for houses in this neighborhood in its present state. (After Repair Value) according to comps IN THE SAME NEIGHBORHOOD for houses that are totally redone It doesn't matter that you only had to put $30k into it. It is what they will pay in the same neighborhood according to the condition it is now in.

Does that help make it any clearer?

Karen

Robert i give it one more shot.
Let's say, the comps in your neighborhood give you 100'000.-- for a house like yours in move in condition and yours needs 30'000.-- in repairs. That means, the ARV of your house 100'000.-- and the FMV is 70'000.--.
I hope I helped you this time!
Thomas

That is a good explanation but I think part of his confusion may be because the numbers weren't adding up as far as $100k FMV + $30k Repairs does not equal $150K. I understand why that could be confusing. But once repairs are done, it can increase the value by more than the dollar amount put into it. (Which I know you know, but others reading this may still not be grasping it)

People pay more when they don't have to bother doing the work. That is why a rehabber is providing a service to them and is compensated for his service by the increase in value. If not, why would THEY do the work?

Remember that "value" is based on what people will pay. That is why accurate comps are so important. What are they "actually" paying for it in its present rough condition (FMV)? And what are they "actually" paying after everything is repaired (ARV)?

Your comps MUST always be in the same neighborhood or as close as they can be. ARV and FMV will always be for where it is located, not according to another area.

Karen

Karen,
he is right about the fact that you don't want to try to sell a 150'000.-- house in a 100'000.-- neighborhood. His example is dreamed up anyway, so is mine. But in my example 100'000.-- is the ARV. You deduct the 30'000.-- repair cost, closing cost, holding cost, realtor cost and your desired profit to determine the highest possible offer amount. After the house is rehabbed ARV and FMV is going to be the same.
Now I'm wondering if we helped him or if we confused him even more.
Thomas

I see if I have it now.
A neighborhood with 30 3/2 cookie cutter houses.
12 of them hit by Tornado. When selecting my sold comps to come up with my FMV, I would have to select only houses that are sold and been hit by the Tornado.
To determine my ARV, I would choose sold houses from the neighborhood that were not touch by the Tornado.

Hence, you have to take the condition of the sold houses into consideration when figuring out your comps.

Oh this is getting more and more fun. Then again, maybe it is me, myself and I who is just makeing it more difficult then it is.

I know. LOL!

Yes, now you have it. Of course, the tornado is extreme, it could just be that a house is 60 yrs old and never been remodeled and lots of others have.

It always seems confusing at first because there is SO much to it all. We all went thru that. It will get easier and easier. I promise.

At least you are smart enough to keep asking until it makes sense.

Karen

Thank you Kaeng, ThomasMeier and everyone else.

Bob

I agree that the ARV can be higher than the current FMV, but it may not be, also. If all of the houses are run down in the neighborhood, if you fix a house up to where it would be worth $110,000, for instance, but the rest of the houses are only valued at $95,000 (without repairs), then you might run into problems.

For example, I have a house for sale right now that a guy was trying to flip. He was trying to do to much to it, and he ran out of time and money. In it's condition when it was bought, it was way below FMV and ARV which, of course, is where we all want to buy properties. But, we want to pay close attention to those comps. The FMV is what it is. If you improve a house too much, your ARV will be too high above FMV, and you won't be able to get your money or time back out of the deal.

It's what we call being over built in real estate. You can have a house that was over built to start off with (a $5,000,000 house in a neighborhood with $300,000 ones), or you can over build a house when rehabbing. In other words, when rehabbing, don't try to create a house that's going to have a ARV of $100,000 in a neighborhood where houses' FMV are only $75,000.

I always determine ARV by the FIXED UP comps in the area I am looking. If fixed up comps are selling at a FMV of $150,000 I know what the ARV will be on my subject property. I certainly don't rehab a house to the point of being a $250,000 house in a $150,000 area. $150,000 is where I would want to list my rehabbed house for sale (maybe a little less or a little more)So I determine the rehab/remodel costs to bring that $150,000 ARV and make my offer accordingly.
So stick by the comps that are fixed up OR in excellent condition to determine your ARV for the subject neighborhood.
Remember, the FMV for a newly rehabbed property in going to be more that a run down REO. In other words I used rehabbed or properties in excellent condition to determine the area FMV, thus my ARV on the subject property.
For me, as a wholesaler and a fix/flipper I really don't care what the current FMV is on the subject property and neither do my investor/buyers!!! ONLY THE FIXED UP COMPS. They look at the back end of the deal. What they can make fixing it up and selling it.
ARV minus repairs, money, holding and closing costs minus their profit is where they/I buy at. We don't exceed the fixed up FMV for the area.
If there are no sold comps that are fixed up or in excellent condition, we look elsewhere.

Just my thoughts,

Michael Mangham
Mentoring/Team Building Nationwide
MD Home Acquisitions LLC

Hi Jeff:
My name is Hector, and i have been studying Deans book for some
time now, and i have been reading blogs on deans media site also for about
4months...Although i have not done my first deal yet,
I sincerely want to do my first deal so that i can be motivated to do more. I live
in Brooklyn NY and i am trying to narrow down the best area to invest in or to
do deals in. I often come across deals, and i would like to call the owner or
real estate agent so that i can make an offer and pass on the deal concentrating only with assignment deals. However, the investors i come across seem not to be
motivated enough to take my deals, for reasons one particular investor feels that the price is not what he expects. For example, although i live in Brooklyn NY, i do come across properties in other boroughs across town, like the 2 houses i found him, that another investor was selling. The seller is selling two homes, one is a 3br, and the other is a 2br., one on one side a block, and the other in back of it on another street, both have different address. The seller is selling both for 289,000 and since he gets his deals from the bank (reo) for only 100,000, the seller just wants to sell quickly. He is in the process of fixing them up to sell, but he will be willing to sell for less, but the new investor would have to continue with the fixtures. So my question is, do you think this is worth pursing or should i just find deals within my own county?
Thanks, Jeff, and i just want to say one final thing, and that is after hearing you speaking with dean in one of the conference calls, i got inspired to work hard on real estate, i just need to do my first deal and i know the rest is history.

Ok now i'm confused on the difference between FMV and ARV.
So,running comps with sold properties brings up the FMV, but it also gives you an idea of what the ARV is?

For example, I'm on the process of placing an offer to a $180K(sellers asking Price) and based on 4 only comps that i could compare using trulia,findcompsnow, and totalviewrealestate.com it came to $263K(also known as FMV)right?
This proerty needs $15k of rehab, so what will the ARV be in this scenario?

Gildardo

You say you compared 4 sold houses to figure out the ARV. Without seeing your numbers, I presume you used 4 houses that were equal in size, year built, and less then 1/2 mile from the subject house. You then determined the price per square foot that the comp houses sold for. Averaged them and then multiplied the subject houses square feet by the average selling price per square foot. and you came up with $263K.

Well that $263K is your ARV.

If all of the above is true, then you have yourself a sweet deal.

Congratulations.

Thanks and yes, i did use 4 houses that were 20% less or more in size and inside the 1/2 radius from the house. But are not the same years built.
So, this is on what i'm confused.Is the $263K the FMV or the ARV?...or both are the same?

ARV is $263K.

FMV is what the house is worth befor you repair it.

Now I understand...Thank you Robert

What rehabbed or houses in great condition SELL for is the FMV you want to look at when determining the ARV for your subject property if you are fix/flipping or wholesaling.
The FMV for a junk house is less than the FMV of a really nice house right?
Junkers have their FMV and nicely fixed up houses have their FMV.
When you buy a junk house to fix it up ALL you care about is what houses are selling for the way you are planning on fixing up your junker. So you determine the FMV on the really nice comps that are selling in your area. Now you have the AFTER REPAIRED VALUE of your junk house.
Make sense?

Michael Mangham
Mentoring/Team Building Nationwide
MD Home Acquisitions LLC

Yes, make perfect sense!... it was because the terms were just confusing me, since after comps some call it FMV and others ARV.

Don't get too concerned about the FMV in the initial stage. The ARV is what really needs to be determined. After all, an investor's goal is to rehab and sell the house at the highest possible price. Therefore, the ARV is what they really want to know. Always use comps for similar houses in the neighborhood that are in good to mint condition to determine its ARV.

Once the ARV is determined, then you can work the numbers backwards to arrive at the FMV. Once FMV is determined, now you can deduct the desired discount. Remember that FMV is unique for the individual house in question. In other words, no two houses are similar in repair costs, therefore it is difficult to compare comps when determining FMV. The only way to determine FMV is to work down from ARV.

Another issue is that retail buyers tend to offer the FMV value. The reasoning is that they are repairing the house for themselves to live in. Unlike an investor, the retail buyer is not concerned with making a profit or factoring the holding/closing costs.

When an investor takes on the job of a rehab, he wants to get paid for it because he is treating it as a business. When an retailer owner rehabs he usually does not take into account his time and effort. It is only when retail owners who can not, or are not willing to get involved in rehabing, can an investor step in and make a profit.

Example of FMV from an investor's perspective:

**ARV $150,000
- 15% holding/closing = $22,500 (85% of $150,000)
- Repair/rehab $20,000
= FMV $107,500
- 20% discount from FMV
= Offer price $86,000 (80% of $120,000)

Example of FMV from a retail buyer's perspective:

**ARV $150,000
- Repair/rehab $20,000
= FMV $130,000
= Offer price $120,000 ($10,000 less than FMV for negotiating purpose)

Hope this makes sense.