Knowing and using after-repair value (ARV) can make or break the budget. Lenders rely on it, banks study it, and investors obsess over it — for good reason. The ARV ultimately determines an investor’s profit. What is it? How is it determined? Why is it important? Continue reading to discover the significance of ARV in the real estate landscape.
Defining After-Repair Value
What if an investor or a homebuyer could convince a lender to provide funds based on a property’s worth after the renovation? Enter ARV. Many lenders issue funds based on the forecasted value of the property. While lenders don’t typically dish out the full after-repair value amount, they do provide up to 80 percent of the value.
For example, an investor desires a derelict property with lucrative potential. An appraiser assesses the current condition of the property and then considers the cost of the rehab and the value the renovations could add to its worth. Before rehab, the property warrants a $400,000 price tag. According to the appraiser, after $300,000 of renovations, the property could be worth $1 million.
Therefore, after-repair value defines as the estimated worth of any property after renovations.
Determining After-Repair Value
Here comes the hard part. Determining the ARV of property hinges on many factors including costs of labor, costs of materials, permit fees, inspection fees, comparable home sales, contractor fees, and much more. Basically, any and all costs associated with rehabbing the property.
This requires a lot of research and estimating by the investor. It’s very important to connect with knowledgeable area contractors and realtors for the most accurate quotes. Investors should also consider the time required for uncovering this info. In some instances, hiring a professional to determine the ARV makes more sense in unfamiliar locales.
The Importance of ARV
The point of investing in properties is to turn a profit. It’s nearly impossible to make money without an accurate cost analysis. For instance, Jim locates a potential fix-and-flip opportunity with a $200,000 property. It needs a lot of work but knowing the area and having a background in construction, Jim guesses the repair costs will total $100,000.
With comparable properties in the area selling at $500,000, Jim assumes he’ll turn a $200,000 profit with an ARV of $500,000. Jim secures a $300,000 loan, makes the purchase, and begins renovation. Soon after, he learns the price of many materials and laborers in the area is higher than expected. He secures more funding and completes the restoration at a final project cost of $450,000.
He sells the house at $490,000 and nets a profit of $40,000, 80 percent lower than projected. There are no shortcuts when establishing an accurate ARV. If the after-repair value is near or below neighboring comps, the investment is likely not worth the time and money. Always estimate high to protect the budget from unforeseen issues.
The team at Sharestates conducts thorough examinations of all aspects of property acquisition to ensure the highest return on investment.