Key Takeaways
- Rehab projects require separate as-is and ARV comp analyses.
- Reverse condition adjustments on renovated comps can supplement limited as-is comp data.
- Always calculate the full margin including holding costs and selling costs before committing.
- A negative margin means the deal does not work—no amount of optimism changes the math.
Rehab projects require two separate comp analyses: an as-is valuation to determine what the property is worth today, and an After-Repair Value (ARV) to estimate what it will be worth after renovation. This case study walks through both analyses for a 1,400 SF bungalow needing $45,000 in renovations.
Case Setup: 1,400 SF Bungalow Renovation
Subject: 3BR/1BA bungalow, 1,400 SF, built 1952, on a 6,000 SF lot in the Eastside neighborhood. Current condition: original kitchen and bathroom, hardwood floors under carpet, functioning but aged HVAC (15 years old), good roof (5 years old), strong bones but cosmetically dated. Planned renovation: kitchen remodel ($18,000), bathroom remodel ($8,000), refinish hardwood floors ($3,500), interior paint ($3,000), HVAC replacement ($6,500), landscaping ($3,000), contingency ($3,000). Total renovation budget: $45,000. Timeline: 3 months. The investor needs to determine: (1) What is the property worth as-is? (2) What will it be worth after renovation (ARV)? (3) Is there sufficient margin between all-in cost and ARV to justify the project?
As-Is Comp Analysis
Finding as-is comps for an unrenovated bungalow is challenging because most recent sales in the Eastside are renovated. Only two unrenovated properties sold in the past year: a 1,300 SF 2BR/1BA at $175,000 (needed more work than subject) and a 1,500 SF 3BR/1BA at $198,000 (similar condition). To supplement, use renovated comps with reverse condition adjustments. Three renovated bungalows sold at $245K, $258K, and $252K. Applying a -$45,000 renovation adjustment produces indicated as-is values of $200K, $213K, and $207K. Reconciling the direct as-is comps ($175K adjusted to $187K for bedroom, $198K) with the reverse-adjusted renovated comps ($200K, $213K, $207K) indicates an as-is value range of $195,000-$207,000, with a midpoint of $200,000.
ARV Analysis and Margin of Safety
For the ARV, the three renovated bungalow sales provide direct comparables: $245K, $258K, and $252K. After size and feature adjustments: Comp 1 ($245K, 1,350 SF, +$2,000 size) = $247K. Comp 2 ($258K, 1,500 SF, -$4,000 size, -$5,000 superior kitchen) = $249K. Comp 3 ($252K, 1,420 SF, -$800 size) = $251,200. Reconciled ARV: $249,000. Now the margin analysis: Purchase price (target): $195,000. Renovation: $45,000. Holding costs (3 months): $5,500 (interest, taxes, insurance, utilities). Selling costs (6% agent + 1.5% closing): $18,675. Total all-in cost: $264,175. ARV: $249,000. This project is upside down by $15,175—the numbers do not work at a $195K purchase price.
| Line Item | Amount | Running Total |
|---|---|---|
| Purchase Price | $195,000 | $195,000 |
| Renovation | $45,000 | $240,000 |
| Holding Costs (3 mo) | $5,500 | $245,500 |
| Selling Costs (7.5%) | $18,675 | $264,175 |
| ARV | $249,000 | |
| Profit / (Loss) | ($15,175) |
Margin analysis for bungalow rehab project
Guided Practice: Adjusting the Deal to Make It Work
The bungalow deal is $15K upside down at $195K. You want to find a purchase price that works.
- 1Target profit: $20,000 minimum for the risk and effort of a 3-month rehab.
- 2Required purchase price: ARV ($249K) − Renovation ($45K) − Holding ($5.5K) − Selling ($18.7K) − Profit ($20K) = $159,800.
- 3Offer $155,000 to the seller, citing your comp analysis and renovation costs.
- 4Alternative: reduce renovation scope to $30K (skip HVAC, basic kitchen refresh) and rerun ARV at $235K for a $30K budget property.
- 5Decision: the deep discount required ($155K vs. $195K ask) suggests this deal only works at a significant discount. Be prepared to walk away.
Key Takeaways
- ✓Rehab projects require separate as-is and ARV comp analyses.
- ✓Reverse condition adjustments on renovated comps can supplement limited as-is comp data.
- ✓Always calculate the full margin including holding costs and selling costs before committing.
- ✓A negative margin means the deal does not work—no amount of optimism changes the math.
Sources
- Appraisal Institute — Sales Comparison Methods(2025-03-15)
- Fannie Mae — Appraisal Guidelines(2025-03-15)
Common Mistakes to Avoid
Selecting comparable properties based on price proximity to a desired value rather than true similarity.
Consequence: Circular reasoning confirms a predetermined conclusion instead of independently estimating market value.
Correction: Select comps based on physical and locational similarity, not on how close their prices are to your target.
Failing to adjust for differences in transaction conditions between comparable sales.
Consequence: Non-arm's-length sales, seller concessions, and financing terms can distort the comp set by 5-15%.
Correction: Verify transaction type and terms for all comps and make appropriate adjustments.
Test Your Knowledge
1.In Case Study: Comp Analysis for a Rehab Project, what determines the reliability of a comparable sale?
2.What is the maximum recommended net adjustment for a single comparable sale?
3.How should the final value be determined from multiple adjusted comparable sales?