After-repair value from comparable sales

Every dollar figure in this lesson is a made-up example. Every price, fee and offer in real life is per house, built from that house's beds, size, condition and neighborhood; county or market averages are only summaries.

Bottom line first. An investor starts every price with one question: what will this house sell for after it is fixed up? That number is the after-repair value, or ARV. You find it by looking at similar houses that really sold nearby, then nudging their prices up or down for each difference. Nothing else in the offer can be right if this number is wrong.

What a comp is

A comp (short for comparable sale) is a house that sold recently and looks a lot like the one you are pricing. Only closed sales count as proof. A listing price is a wish, and a pending sale is a promise; a closed sale is what a buyer actually paid. Good comps share most of these traits with your house:

• Close by. Same neighborhood or subdivision if you can. One side of a busy road to the other can be worth thousands.
• Recent. Sold in roughly the last three to six months. In a market that moves fast, older sales say less.
• Same type and similar size. A ranch with a ranch, not a two-story. Within a couple of hundred square feet is a reasonable start.
• Same bedrooms and bathrooms, or as close as you can find.
• Same condition you will deliver. This is the one beginners miss. For an ARV you want comps that are already fixed up, because your finished house will compete with them. A worn-out sale tells you the "before" price, not the "after."

Adjusting: closing the gaps

No two houses match. An adjustment is a dollar amount you add or subtract so the comp acts as if it were your house. The rule is simple. Ask, "If the comp had what my house has, would it have sold for more or less?" If your house is better in some way, add to the comp. If your house is worse, subtract.

Suppose a comp has an extra half-bath that your house lacks. The comp is better, so you subtract the value of a half-bath from the comp's sale price. If the comp is smaller than your house, you add. The common adjustments are:

• Size. A price per square foot is a sale price divided by living area. Use it to value the size gap, not to price the whole house.
• Bedrooms and bathrooms. A missing bath or bedroom usually matters more than a few extra square feet.
• Condition and finishes. Updated kitchen, new floors, a worn roof.
• Garage, lot, basement. A one-car garage against a two-car garage, a finished basement against an unfinished one.
• Location. Backing to a busy road, a better school boundary, a view, a quieter street.

Where do the adjustment dollars come from? From the market itself. Find pairs of sales that differ in just one way (the same street, one with a garage, one without) and see how far apart they sold. The amounts you use are per house and per neighborhood; a bath that adds a lot in one area may add little in another. Keep each adjustment modest. If you need big adjustments to make a comp work, it is not a good comp, so find a closer one.

From adjusted comps to one number

After adjusting, you will have several adjusted values. They should land close together. If one is far from the rest, look for a reason (a rushed sale, a mistake in the records, a feature you missed) before you trust or throw it out. Then pick a number. Many investors give the most weight to the comp that needed the fewest adjustments and sits closest in distance and date. Averaging two or three adjusted values is also common. Round to a clean figure, and when you are unsure, round down. A too-high ARV is the most expensive mistake in this business.

Example with real numbers

Meet our practice house. It is a made-up 3-bed, 2-bath, 1,400 square foot ranch in a made-up neighborhood called Aspen Bend Heights. It needs work. We want its ARV, so we look for three fixed-up sales nearby. For this example only, we say a square foot of size is worth $120 and the other adjustments are as shown.

Comp	What differs from our house	Sold for	Adjustments	Adjusted value
A	1,450 sq ft (50 bigger), two-car garage (ours is one-car)	$462,000	-$6,000 size (50 x $120), -$8,000 garage	$448,000
B	1,380 sq ft (20 smaller), otherwise alike	$447,000	+$2,400 size (20 x $120)	$449,400
C	Only 1.5 baths, backs to a busy road	$441,000	+$7,000 half-bath, +$6,000 location	$454,000

Check the work. Comp A: $462,000 - $6,000 - $8,000 = $448,000. Comp B: $447,000 + $2,400 = $449,400. Comp C: $441,000 + $7,000 + $6,000 = $454,000. The three adjusted values sit within $6,000 of each other, which is a healthy sign. Their average is ($448,000 + $449,400 + $454,000) / 3 = $1,351,400 / 3, which is about $450,467. Comp B needed the smallest adjustment, and it is right at $449,400. We round down and call the ARV $450,000. That is the number we carry through the rest of this course.

Notice what we did not do. We did not take a county-wide average and multiply by 1,400 square feet. A county number mixes mountain cabins with starter ranches. Only this house's own beds, baths, size, condition and street can price this house.

Common mistakes

• Using unrepaired sales as comps for a finished house.
• Reaching two miles away because the nearby sales were low.
• Stacking so many adjustments that the comp stops resembling your house.
• Using the asking price of a house that has sat unsold for months.
• Trusting the highest adjusted value because it feels good. Lean toward the lower, steadier ones.

Next lesson prices the repairs that turn our practice house into the one in those comps.