The real estate market can be as confusing as it gets, especially with all the jargon relating to the sector. As an investor, you want to make an effort to ensure that you understand the most important terms. And with regard to home value, you don’t want to make any mistake. Determining a home’s value before and after repairs is an integral part of real estate investing. In this article, we tell you the meaning of ARV, and how it differs from other terms like As-As Value and After Market Value.
What, exactly, is ARV?
In the real estate industry, ARV is an abbreviation for after repair value. It simply refers to the estimated property value after being completely rehabbed or renovated. The ARV is a crucial figure for individuals renting or flipping homes as it enables them to determine the spread between what the home should be bought for and the value you can resell it for. ARV implies the value of a property after it has been repaired and ready to be rented or flipped. It is this figure that determines your ROI- return on investment.
Factors to consider
Real estate investing, especially flipping properties, often requires that a property to be purchased is first renovated in some way. The rehabilitation is usually repairs and cosmetics. Sometimes the nature of repair is a remodel or an extensive rehab. As a successful investor, you must pay careful attention to several items:
- Can the investor do the repair work or be able to identify and properly supervise contractors so as to get the work done?
- Has the real estate investor precisely estimated the cost of all the repair and remodel work?
- Is there a precise estimate of the ARV of the property?
It is important that all these steps are not only completed but also with great accuracy. There is no way you will be flipping or investing long if your refurbishment costs run over estimates. The same applies to if your incorrectly calculate your ARV. Majority of investors understand their markets and areas, have sufficient home sales records just like the subject property, and are confident in their ability to confirm the property value once renovations are complete.
It differs from As-Is value
The As-Is value of property simply means its value in its present condition. It is the value of a home without having any repairs done. AS IS implies just that, with no repairs, money or credits towards repairs.
The market value of a home refers to the price which a home is expected to be sold in an open market. The value is usually derived from comparable sales approach. It involves determining the market value of a property by looking at prices the nearby comparable properties have recently been sold for.
But with regards to appraisals, there are two other ways appraisers assess the value of a property. The first one is the replacement value, which is simply the dollar figure it would cost to construct a specific home today at the current construction costs taking the value of the land into consideration. The last approach is the income approach. This is used for determining a property’s value based on the income it’s providing currently. The value is normally given the greatest weight in commercial real estate investing where there are several units all bringing in income.
Tips for ARV
Get material estimates right and make sure that you purchase at discounts. Work with big box home stores and rehab stores and liquidators.
Understand your contractors as well as their capabilities. You should supervise to be sure that you get quality work done not only inside budget but also delivered on time.
Budget according to your buyer: if your intention is to sell to rental property investor, make sure you keep your materials in an acceptable range. If selling in consumer retail market, do upgrade to finishes buyers want, because you are selling in a competitive marketplace.