What is After Repair Value? Guide for New Real Estate Investors
If you are getting into real estate investing, one of the first pieces of jargon you are going to hear is After Repair Value (ARV). It seems technical, but it is simple in concept with powerful implications: ARV is the projected value of the property after it has been repaired. This is important for the investor in deciding if the deal is worthwhile.
You should think of it as your guide to knowing the potential profit before you put money into any type of real estate. Without it, you’re basically guessing, and that can be expensive. In light of this, we’ll break down what ARV means and why it matters so much when analyzing deals.
What is After Repair Value?
Avoid Overpaying for a Property
When most investors enter the real estate investing world, it’s easy to get excited about the way the property looks. You think, “Wow! This is a hidden gem”, or you envision the possibilities after putting in a few upgrades. What we need to focus on is not what the property is worth today, but what that property is worth after the renovations are reviewed. This is where we introduce the After Repair Value or ARV.
The After Repair Value is the estimated market value of a property once the improvements or renovations are completed. Think of it as a reality check so you can avoid overpaying upfront, by letting you know what the property will actually sell for once the renovations are complete. If you don’t perform the ARV, you run the risk of putting good money into a deal that looks good on paper but does not deliver a profit. Consult with an experienced property manager in Washington DC on possible unforeseen costs during repairs. At the end of the day, ARV protects your wallet and keeps your investment strategy grounded in numbers, not just emotions.
Calculate a Project’s Potential Profit
When it comes to the term After Repair Value (ARV) in regard to a home, investors are basically talking about the property’s value to them in the future. ARV is the home’s expected value once all planned repairs and improvements are made. To put it another way, ARV is the price of the finished product, or what a potential buyer would likely pay for it if it were to be marketed after all repairs and improvements are made.
This is important because it is the ARV that you are using to base your computations; in other words, that is part of getting to your potential profit. Let’s say you find an investment property to buy for $150,000, you want to spend $30,000 to fix it up, and it has an After Repair Value of $250,000. You can easily do the computations to see if the numbers work for you. Your potential profit is the amount left over after you subtract the purchase price and the cost of improvements from the ARV or other costs that may be incurred, such as closing costs or real estate commissions. There are also property upgrades that don’t add value, so it’s important to check with multiple contractors first. Being aware of the ARV in advance allows you to negotiate better and prevents you from overpaying.
What is the 70% Rule in After Repair Value?
The 70% Rule is a mental framework for investors to determine the value of a property that needs work. This helps you to avoid surprises in costs or unexpected repairs, allowing you to keep your profit! The concept is that you would not pay more than 70% of the After Repair Value (ARV), less the repairs.
Let’s say, for instance, that your ARV is $200,000, and the repairs will be $40,000. First, you get to 70% of $200,000, which is $140,000. Then, you will take out the $40,000 for repairs. So, you should not pay more than $100,000 for the property.
This helps provide an allowance for closing fees, holding costs, plus any surprise costs you may run into on the remodel. This is not a firm rule, but it serves as a starting point in your equation, given that competitive marketplaces or unique properties should accommodate different situations. By using the 70% Rule, you are helping limit your risk of overpaying and increasing your potential for a healthy profit when you sell or refinance the finished property.
Risks and Limitations of After-Repair Value
ARV as an Estimate
Although After Repair Value (ARV) is a valuable term, it remains an estimation, and estimates can be inaccurate. The ARV you feel comfortable with today might not end up being reasonable by the time your renovations are finished due to fluctuations in the real estate market. If the market slows or interest rates climb, your house might not sell for the price you anticipated.
Another risk with using ARV is comparing to bad comps. If you are comparing your property to homes that are a different size, location, or condition, your ARV calculation will be unfavorable. Repairs may also underestimate or shorten estimates, such as plumbing problems or foundation problems, you can estimate profit taking those into account.
Even a professional appraisal does not guarantee projections. Professional appraisers have to rely on data that is available at the time of the appraisal, and they do not account for either delays or unforeseen changes in the economy. Always think of ARV as a range and not to be considered a number to plan with. Plan on a vote of funds, change your repair budgets, and keep track of market activity. If you are thoughtful and careful, as you go, at least you’ll be able to adjust even with changes.
Prepare for Unforeseen Costs
Real estate markets can change quickly, and even after making an educated guess, you ultimately could be wrong. Using comparable sales can be a real liability if the comparable sales are really old or questionable. If the market cools down, or homes in the area sell for less than what you expected, your guess for profit above the purchase price can disappear, since renovation costs may also surprise you in the end. If there are hidden structural issues or the anticipated cost for materials increases, you could find it in your budget. Even seasoned investors end up facing surprises, whether it is more repairs than originally anticipated or costs are higher than originally budgeted.
At the end of the day, you may have huffed up how much value buyers will want your finished house to be. Just because you are in love with the upgrades and work that you made, doesn’t mean buyers are going to value the upgrades in the way that you are. With that said, you will want to protect yourself by assigning a cushion for your repair budget and timeline. Check the comps, get estimates from multiple contractors, or just follow the trend to stay on task. Remember, ARV is a great guess estimate, but it is never 100% accurate, so plan for surprises along the way.
Conclusion
Knowing the After Repair Value will help paint the picture of what lies ahead, avoiding expensive pitfalls. By estimating value post-renovation, you can confidently plan a profit, repair budget, and offer purchase price. Always double-check comps, use the 70% Rule as your compass, and have a buffer for surprises. Investing in real estate involves some risk, but with ARV in your toolbox, you’ll know you’ve made the most clear, informed decision every time.
Guest Post Written by Bay Property Management Group
