Real estate investors rarely buy pristine houses. A house that doesn’t require any work has less value for an investor, as a state of disrepair can often mean added profit for the savvy investor who knows how to fix up a house. A good investor knows how much the repairs and renovations cost and knows how quickly the work will take, but the use of real estate comparables is essential in knowing how much the home will be worth when the work is completed.
The price a home will sell for when fully fixed up is called the After Repair Value (ARV). The ARV represents the best retail value of the house, and is calculated using home comparables. A smart investor will deduct the total repair costs from the After Repair Value obtained from real estate comparables to give a figure for the project’s overall profitability. This allows investors to quickly make decisions about the risks versus the rewards for potentially invested capital.
Real Estate Comparables and After Repair Value
Home comparables are an essential tool for real estate investors to operate a successful business. While many real estate investors have a background in the building trade, and so can quickly and accurately determine the total repair cost, knowing the value of all that work is very important in the decision of whether it is worth the investment.
If an investor doesn’t use real estate comparables to define the house’s retail value, they can find themselves in a position with capital tied up in lengthy and complex endeavors which simply don’t have the same return as quicker, less complex projects.
How do Real Estate Comparables Work?
A good or a bad investment depends on the economic viability of the project. A smart investor will use property comparables to calculate the maximum value the house could achieve if all the repairs were completed.
Real estate comparables are compiled from MLS data to give accurate information on similar homes which sold in the same neighborhood. While every house is different, real estate comparables can be used to gauge the price a project will achieve once all the repairs are completed. Home comparables look at the number of bedrooms, the number of bathrooms, the square footage, and the many other factors which come into play when considering the desirability of a home. Property comparables take into account factors such access to amenities and the home’s curbside appeal, allowing investors to intuitively know exactly where a house will feature in a chosen market.
Real Estate Comparables in Texas
Every investor needs access to good quality real estate comparables. In Texas, home comparables are not widely available to the public due to the non-disclosure policy. This means that the homes which are sold do not go onto a public record, however, real estate comparables are still available in Texas through Realtors and Appraisers. Investors should be aware that property comparables which do not come from MLS data are not constructed using actual sold data, and should be examined with suspicion.
Image courtesy: Flickr and Maciej Latałło