Understanding the After Repair Value is an important skill in real estate investing, especially if you are engaged in flipping houses. It helps the flippers to assess whether the property has a good potential investment and to determine the maximum allowable offer.
What is After Repair Value?
After Repair Value (ARV) is the value of the property after fixing, renovating and improving it. ARV is determined both by market influence and property condition. The common factors affecting ARV are the comps, condition, year built, and construction type of the property.
How does the market work?
The fundamental concept in the market is the relation of supply and demand. Generally, if there is more demand than supply, the prices will go up. If there is more supply than demand, the prices will go down. Every real estate market is different, that is why you need to have a market analysis and assess the advantages and disadvantages before entering a deal.
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Knowing the basic terms
Real estate investing has a rich language and jargon. You need to have a working knowledge on the basic terms to avoid confusion and to negotiate well. In understanding the ARV, the following are the terms that you need to know:
Assessed value refers to the valuation set upon the property for taxation purposes . It is the value assigned to property used to determine the applicable tax. The government assessor is the person responsible in determining the assessed value of a property.
Appraised value refers to an estimate of the present worth of the property at a given time. A professional appraiser performs the evaluation of the property’s worth. The appraised value will increase by introducing repairs, improvements and renovations to the property.
Market Value refers to the highest price a ready, willing and able buyer would pay; and the lowest price a ready, willing and able seller would accept, neither being under any pressure to act. To better understand the market value, you need to know whether a factor affects the market value or not.
Factors that affect the market value:
- Property condition
- Current Inventory
- Days of the Market
- Changes in Local Landscape
- Market Trends: Appreciating or declining
Factors that do not affect the market value:
- What you paid
- What neighbor Bob says
- What you need and what you want
Calculating the ARV
In calculating the ARV, you need to find at least 3 to 6 comparable properties sold for not more than 90 days. After doing so, you need to calculate the average of the sales price of comparable properties. Calculating the ARV will help you know the amount you can loan in funding the property. Some money lenders offer a maximum loan percentage amount based on the ARV. Calculating the ARV can also help you to set your maximum price offer.
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Joseph James is the founder and President of www.roimuse.com, a company that provides Systems, Tools and Training for Real Estate Agents and Investors. His achievements include being a real estate trainer for single family, multifamily, and commercial real estate investments; serving as the Commercial Advisor of Real Estate IQ and the Director for Commercial Group in 2020.
The blog articles are intended for educational and informational purposes only. Nothing in the content is intended as legal or financial advice.