In real estate investing, the After-Repair Value (ARV) represents the estimated value of a property after repairs. Investors who buy and rehab properties for profit typically rely on the ARV and other metrics when evaluating potential prospects.
Real estate investors use the ARV meaning to calculate a property’s forecasted value after repairs and renovations. The ARV helps investors determine how much to bid on a property in order to return a reasonable profit.
ARV differs from other metrics, such as market value and purchase price. Market value reflects the amount an informed buyer is willing to pay for a property based on other recent sales of similar properties. The purchase price is the amount paid for a property, including its sale price and other add-ons such as closing costs and taxes.
Why ARV Is Crucial for Real Estate Investors
The ARV plays two distinct roles in real estate investing.
First, it can help evaluate a property’s viability. A viable investment property will meet the buyer’s desired return on investment (ROI) and cover the expenses of renovations and repairs.
ARVs also help secure financing. In real estate flipping, lenders typically include ARVs in the loan evaluation process. The lender may have a baseline ARV and expect the investor to come up with additional funds to cover the difference.
For instance, if the lender’s ARV is 65% and the buyer bids 70% of the property’s ARV, the investor would fund the 5% difference if the seller accepts the offer. The closer the buyer’s bid is to the lender’s desired ARV, the less of their own funds they’ll need to rely on to seal the deal.
How to Calculate ARV
There are three basic steps to calculate ARV.
Step 1: Assess the Property’s Current Value
First, you’ll want to evaluate the property’s estimated value using a market analysis. You can look at recently sold properties in the area that share similarities, including size, features, condition, age, and location. Try to focus on properties sold within the past 30 to 90 days.
Step 2: Estimate the Cost of Repairs and Renovations
What repairs and renovations are necessary to optimize the property’s market value? Identify the rehab work needed and request quotes from the appropriate stakeholders. Accurately budgeting repair work can help you project expected profits from the project.
Step 3: Determine the ARV
Once you determine the property’s current value and expected costs for repairs and renovations, add them together to arrive at the ARV. For instance, if an investment property’s current value is $200,000 and estimated repairs are $45,000, the ARV is $245,000.
Common Mistakes to Avoid When Using ARV
ARV is only as accurate as the data used to calculate it.
One common error is using overly inflated property values. Be careful to select comparison properties that closely align with your chosen property.
Another error is underestimating renovation costs. While you may assume you can get rehabilitation work done cheaply, it’s not uncommon to encounter additional expenses as the project unfolds, which may eat into profits.
Finally, don’t ignore the possibility of market fluctuations that can change the property’s value. It may be weeks or months before you can get the property back on the market. So, it’s essential to account for any variables that may impact its future sale price.
Get Help From Dominion Financial Services
Dominion Financial Services offers short-term bridge loans and long-term rental loans to real estate investors looking for their next property. Contact us today for tailored financing solutions and expert guidance.
