ARV Calculation Case Study

• John Vandivier

I'm trying to estimate the after repair value (ARV) of a home I own in Alexandria, VA. This article show initial steps in doing that.

My basic approach to ARV estimation is to comp the target house plan. While I'm at it, I also comp my current house as a validation approach. I use five sources: Zillow, Redfin, and Realtor.com. The first three are freely available, the last is a paid product but they have a 1 month free trial. I considered CoreLogic, but some mean internet posts steered me away. Perhaps I will try them later because, you know, you can't trust these trolls.

My approach with comps is to match within my neighborhood. If a build within my neighborhood doesn't exist, or if the samples are very thin (<10), I will look around within the zip code, then adjacent zip codes, but within the same state. It is a red flag if there aren't many of the target build within the same zip code. Such comps are weaker and therefore we have less confidence in the estimates, but it's better than nothing.

BuildZillowRedfinRealtor.com
4/2 n1115
4/2 House447K535K474K
4/2 Sqft60019661528
4/2 $ Per Sqft600254310
4/3 n376
4/3 House549K536K500K
4/3 Sqft200316591910
4/3 $ Per Sqft274323262
5/3 n671
5/3 House503K519K516K
5/3 Sqft181319001235
5/3 $ Per Sqft277274418
6/4 n100
6/4 House700Kn/an/a
6/4 Sqft4542n/an/a
6/4 $ Per Sqft154n/an/a

For reference, these comps are against 6904 Vantage Drive, Alexandria, VA. It's in a neighborhood called Groveton within zip code 22306. WIthin Groveton, I preferred comps west of Highway 1. Data observed on 3/11/2019-3/12/2019. We paid 500k for this property, which is clearly above comp. We did that because the way this house is built allows a 1/1 rental in an in-law suite with own washer, dryer, kitchen, air conditioning, and entrance. This was a feature other properties simply lack and it generates cash flow. I personally value this feature enough to fully explain the difference in comps. So about 20-30k for that feature.

The Redfin and Zillow facts for 4/2 are based on those companies estimates. Notably, Zillow has the house listed as a 1/1 with 600 sqft. This is actually the spec for the rentable guest suite, and Zillow had picked that up instead of the main house.

One of the nice things about good comp research is that it will cause you to think about things you previously hadn't considered. Zillow had a single observation for a 6/4 recent sale in 2018, but the $ per square foot was quite low. However, in Oct 2017 there was a relatively comparable sale which was a 6/4.5 at 2281 square feet which sold for 766K, and VA market prices were higher in 2018 than 2017, in general and for this home size:

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The 6/4.5, then, comes in at about $330 per square foot. The results of my analysis indicate the price per square foot diminishes with an increase of square feet, but not obviously by increasing the number of bedrooms or bathrooms in a way that makes sense. Having more baths than bedrooms would be something which doesn't make sense. The price per square foot ranges from about 250-330, and I would favor a 6/4.5 build over a 6/4.

This is good information for the benefit side of the cost-benefit calculation. I haven't really gone into costs, but one point is that in general building up is cheaper than building out on an existing home. The maximum square footage of my house after renovation, then, would be to add a level across the entire home, doubling our current 1966 to about 3900. Let's use the central estimate of price per square foot at 250+330/2 = 290. This puts an expected sale price on the house after renovation at 290*3900 = 1.1M. This is a bad estimate for a couple reasons.

First, at 3900 square feet we are now outside the size of our comp data. Our closest comp by square footage would be the 6/4 build which had a per square foot price of about 150. Using 150 instead of 290 puts a 3900 house at 585K. I would argue this is on the low side, because we would target a 6/4.5 build, not a 6/4 build, and if a 6/4.5 can go for 766K at 2281 square feet, we would think a 6/4.5 at 3900 square feet can at least fetch that same 766K. This goes to my second concern with the 1.1M figure: It's higher than any comp as a total house price. I think a fair thing to do here would be to estimate the 3900 build at 750K which is a conservative approach to matching it against the 766K sale with a similar build and fewer square feet. Once you count appreciation on the 766K house, this 750K is even more conservative.

While I don't like comparing features because we start to get into selection bias, there's one feature the current house has which I think makes it worth even more than otherwise stated. The in-law suite facilitates house hacking. The in-law suite is currently a 1/1, but after upgrade it would be a 2/2 or possibly a 2/2.5. This is a killer feature in my book, and something the 766K house doesn't offer.

Now, the 5/3 build surely won't be worth more than the 6/4.5 build. Suppose the 5/3 build adds half the square footage that the 6/4.5 build would add. The after build size of the 5/3 would be about 3000 square feet. At $250 per square foot, this would come in at 750K, but this is the same price I expect the 6/4.5 to come in at, and it's also high compared to other 5/3 comps. I could say this means we shouldn't spend on a 6/4.5 because it gains us nothing, but I think a more conservative approach would be to say that we should limit the max 5/3 sale price to our comps. This would seem to cap the sale price at 600K, and really even then the comps seem favorable to a 5/4 build over a 5/3 build at 2000-3000 square feet.

If a 4/3 adds 100 square feet then at 250 per square foot the build would sell for about 525K. Compared to comps, I think it might even go for 550K. We will separately consider the cost side in-depth, but based on these three builds I'm already starting to like either just doing a bathroom or doing the whole second story. Our 5/3-5/4 estimates forced us to cut the average price per square foot, but the 4/3 might be worth more than the average price per square foot. At the same time the 4/3 isn't gaining much in total square feet and may cost quite a bit, although we will hold off on that judgement. The 6/4.5 gains significantly in square footage, although we are being risky by really only looking at one or two comps. It also gains us in rental income potential.