Pricing properties for sale is not an easy task. The market fluctuates so often, and it takes a keen eye to land on a price that makes everyone happy. Luckily for all of us, Realtors and real estate agents have this keen eye. So much so that they have their own acronym for the calculations they make known as “RVM.” But what is RVM in real estate investing and should you rely on it for your portfolio?
RVM stands for Realtor Value Method and is the calculation a real estate agent will make to determine a fair market value for a property before it’s listed for sale. RVM relies heavily on finding comparables (or “comps”) in the area but may also include cost or cash flow if dealing with commercial real estate. It’s common for the RVM you receive to be a range instead of a single number.
Let’s do a deeper dive into just how RVM works. Plus, I’ll give you a little more information about how comps work and my own method for determining the value of a property that works flawlessly. Check it out.
How the Realtor Value Method Works
If you’ve never heard of RVM, don’t worry because it’s not used that often. Also, for a little extra fun fact, there’s also the acronym “AVM,” which stands for Automated Value Management. AVM is also rarely used, but now you have a little more real estate lingo under your belt. You’re welcome?
RVM is essentially the best guess your Realtor or real estate agent has for how much a property will sell in the current market. Scientists have their hypotheses, Realtors have their RVM.
When you receive an RVM, it will usually be given as a range rather than a specific number, as it’s more of an educated guess than a guarantee. The range may also be way off from what your bank appraises the home for, but in most cases, these should line up fairly closely if you’re dealing with an experienced agent.
How Do Real Estate Agents Determine the Value of a Property?
For a real estate agent to start calculating RVM, they first need a willing seller and an able buyer. Without these two people, it’s impossible to guess the value of a property. Your agent needs to know what the floor (the lowest price) and the ceiling (the highest price) are for both parties. Otherwise they’re just feeling around in the dark. If they give an estimate that’s too high, the buyer could get scared away. If they price the home too low, they could lose the seller. All in all, it’s a very thin tightrope the agent has to walk.
Next comes comparables. Comparables (also known as “comps”) are properties that are very similar to the home being put up for sale. The real estate agent will look at both recently sold comps, as well as comps that are currently on the market.
If the sold comps are averaging a higher price than currently listed comps, this tells your agent that the market is cooling off, so the RVM should be more conservative. If the active listings are averaging a higher asking price than what the sold comps cost, this tells the agent that the market is on an upswing, so they should be more optimistic about the listing price.
The Three Methods for Determining Property Value
If you’re looking at residential properties, then the comparables method will be a fairly standard way to determine value.
Commercial and multiplex (built for 4+ families) rental properties are a little different as it’s much more difficult to find adequate comps for things like office buildings and apartment complexes. Comparables in commercial real estate also don’t use the same rules as residential, as it’s very common for commercial properties to sit on the market for years while they wait for their Goldilocks-style buyer. When you’re moving a business to a new space, it’s got to be just right to make it worth the effort. With residential properties, seeing a house listed for over a year would raise giant red flags.
So for commercial or industrial properties, agents will typically use one of these two methods:
- Cost – How much would it cost to reconstruct this building?
- Cash Flow – How much money would this property bring to the owner every month? There’s usually a capitalization rate (also called a “cap rate”) determination that tries to calculate the net income after expenses are taken out.
What if My Real Estate Agent Can’t Find Comparables?
If you’re in an area that has a slow market where homes just aren’t being sold often, it can be difficult to find adequate comps for your property. When comps are slim to none, real estate agents will start doing what’s known as “Adjustments.”
Adjustments are comps that have a little wiggle room in terms of how they line up to your property. Things like square footage, number of bathrooms or bedrooms, lot size, etc., are all variables that agents can adjust to find a reasonable RVM. That said, adjustments make it more challenging to be sure that you’re getting a realistic number as it puts many variables up for grabs.
My Method for Finding Real Estate Comparables
I have my own method for finding comps for potential properties I want to buy. Even if you’re not a real estate agent, it’s good to research comparable properties yourself. That way, you have a better picture when it comes to profitability, how hot the market is, and other critical factors for real estate investors.
My method works like this:
- Stick to 1 and 1 – Find comps that are within one mile and have been sold within one year. To be honest, one year is even longer than I usually like, but that’s the max I’m willing to go if it’s a slow market. If you’re in a hotter market, six months should be your cut-off length of time.
- Find 4 for both – To get a complete picture of what I might be able to charge for a fix & flip, I’ll try to find four comps that have recently sold and another four comps which are currently listed for sale.
Once I have my eight comps, I’ll find the average sale price by adding all the sold prices and dividing by eight (the number of total properties used). It’s elegant in its simplicity and works every time.
Determining RVM for both buying and selling properties is a smart way to ensure you’re not pricing yourself out of the market or leaving money on the table. Give my method a try and see how closely it matches the range your real estate agent brings.
Have any more questions about RVMs or comps? Leave a comment and let me know; I just might answer you in one of my “Ask Ryan” videos!