Home Value – How to Determine the Value of Your Home

The simplest way to determine the value of your home is to hire a professional appraiser, which typically costs between $350 to $700. However, if you’re looking for a more budget-friendly option, there’s an alternative approach you can take.

At [Company Name], we evaluate home value from an investor’s perspective. The first and arguably most crucial step is determining the After Repair Value (ARV). ARV refers to the value of a home after it has been renovated or updated to meet current market standards. This is a home in good to excellent condition that would qualify for a loan from a retail buyer – someone intending to live in the property.

To calculate the ARV, we analyze recent sales of similar homes, typically within the last six months. This process is called a Comparable Sales Analysis (CSA). The homes selected for comparison must be similar in age, size, number of bedrooms and bathrooms, and located within a reasonable distance of your property. Unfortunately, access to recent sales data is generally restricted to real estate professionals, like realtors.

However, homeowners can estimate the ARV by looking at properties currently listed for sale in the area. Local real estate websites, often run by realtor organizations, provide this information. Keep in mind that listing prices aren’t always final sale prices, so some adjustments might be necessary when making your estimate.

Evaluating Home Repairs and Selling Costs

Once the After Repair Value (ARV) is determined, the next step is to assess which areas of the home need remodeling, repair, or replacement to meet current market standards. Kitchens and bathrooms are often the primary focus, as they tend to be the most expensive and complex areas to modify or upgrade. Additionally, the major systems of the home must be in good working order. These key systems include:

• Foundation

• Roof

• Plumbing

• HVAC (heating, ventilation, and air conditioning system)

If any of these systems are in poor condition or don’t meet local building codes, repairs or replacements will be necessary. Fixing or replacing these systems can be costly, so it’s crucial to factor these expenses into your analysis.

Once repair estimates are made, the next step is to calculate the selling costs for a traditional real estate sale. Typically, this involves signing a contract with a realtor, conducting showings or open houses, waiting for a retail buyer to secure financing, and paying the realtor a 6% commission if they successfully sell the property. After all these expenses, the remaining amount is considered the homeowner’s equity.

Let’s walk through an example to see how this works. In this case, let’s assume that only one major system needs repair – the roof. We also assume moderate rehab/remodel costs of $12 per square foot for a 2500 square foot house, which totals $30,000. The investor will also have to resell the house after repairs and will incur additional closing costs, including the realtor commission.

Here’s a breakdown of the typical math that investors would use when analyzing the property:

• Cost of repairs: $30,000 for general remodeling and a new roof

• Realtor commission: 6% of the ARV

• Other closing costs: Additional selling expenses

This example represents a common investor’s approach, assuming they purchase the home in its current “as-is” condition, meaning fair physical state without additional immediate repairs.

Calculation of Home Value for Investors

Let's break down the detailed approach to determining the value of a home for an investor, considering all costs involved in buying, repairing, and reselling the property:

Full Calculation Method:

1. ARV (After Repair Value): $250,000
   
   

• This is the estimated value of the home after all repairs and remodeling are completed.

2. Roof Replacement: $10,000
   
   

• Cost to replace the roof to bring it up to standard.

3. Estimated Rehab/Remodel Expenses: $30,000
   
   

• This is the cost of general repairs and updates to bring the house to current market standards.

4. Holding Costs: $22,500
   
   

• Includes property taxes, insurance, and financing costs (calculated as 1.5% per month for 6 months).

5. Realtor Commission: $15,000
   
   

• 6% of the ARV ($250,000 x 6%).

6. Title Insurance and Closing Fees: $5,000
   
   

• 2% of the ARV ($250,000 x 2%).

7. Repair Reserve for Retail Buyer: $5,000
   
   

• 2% of the ARV to set aside for any issues that may arise during the sale process.

8. Investor Profit: $25,000
   
   

• The profit margin for the investor, calculated as 10% of the ARV ($250,000 x 10%).

 

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Total Calculation:

To calculate the investor’s price for the home in "as-is" condition, we sum all the costs involved:

• Total costs and profits:

• Roof Replacement: $10,000

• Rehab Expenses: $30,000

• Holding Costs: $22,500

• Realtor Commission: $15,000

• Title Insurance + Closing Fees: $5,000

• Repair Reserve: $5,000

• Investor Profit: $25,000

• Total: $117,500

Value of House in "As-Is" Condition = $250,000 (ARV) - $117,500 = $137,500

The Investor's Assumed Risks:

The investor assumes several risks in the transaction, including:

1. Market Risk: The risk that the real estate market could decline, affecting the sale price.

2. Unknown Property Issues: The risk of discovering hidden problems, such as termite damage, that could require additional repairs.

3. Contractor Risks: The risk of hiring, monitoring, and managing contractors for repairs.

4. ARV Estimation Risk: The possibility that the ARV estimate may turn out to be too high.

5. Property Upgrade: The risk of investing time and money to bring the property to excellent physical condition.

 

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Shortcut Method for Determining Home Value:

Many investors use a simplified method to estimate the value of a property they want to buy. Here’s how:

1. ARV (After Repair Value): $250,000
   
   

2. 30% Discount off ARV: $75,000
   
   

• Investors typically discount the ARV by 30% to account for risks, costs, and profits.

3. Rehab/Remodel Costs: $40,000
   
   

• Includes roof replacement ($10,000) and general rehab expenses ($30,000).

 

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Shortcut Calculation:

• ARV: $250,000

• 30% Discount: -$75,000

• Rehab Costs: -$40,000

• Value of House in "As-Is" Condition = $250,000 - $75,000 - $40,000 = $135,000

 

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Final Thoughts:

Both methods yield similar results:

• The full method suggests an investor would offer $137,500 for the house.

• The shortcut method suggests an offer of $135,000.

In both cases, the investor is considering the costs of repairs, commissions, and the risk associated with the investment. Therefore, the price the investor would typically offer for the property in "as-is" condition is between $135,000 and $137,500.