When getting your home ready to sell and putting it up on the market there are many different things involved. You’ve probably heard many new terms that you are unfamiliar with. One term that many clients are unfamiliar with is ARV.
ARV stands for After Repair Value. This term means pretty much what it sounds like. What is the value of a home after being repaired, renovated, or refurbished? Understandably, this is a really difficult thing for any appraiser to judge.
Since the after repair value isn’t the current value of the home but instead an estimation of the home’s value once renovations/repairs have been made, it can be quite a tricky task for an appraiser to come up with a proper estimate.
So how exactly do appraisers estimate that value with any real certainty?
How Appraisers Calculate ARV:
There are several steps involved when trying to calculate the after repair value of a property. Figuring out the current value of the property is the first step. Then you need to look at repair costs as well as the cost of repairs and renovations to the property.
Finally, you will need to find comps in the area to help estimate what the final costs will be and how much the property will be worth once renovations have taken place.
Calculate the As-Is Value
Like we said before, the very first step to determining the ARV of a property is actually determining the property’s current value also known as the “as-is” value. This is where an appraiser can really shine. Determining the “as-is” value of a property is what appraisers do best.
An appraiser will need to take many things into consideration when trying to estimate the current value of the home. Things like the size of the overall property, the actual square footage of the home, the neighboorhood. Even things like the style of home, the number of bedrooms/bathrooms, as well as what type of condition everything is in.
They will also take into account how recently any renovations have been done to the property already and also things like flood zones. There are so many factors that go into calculating a home’s current value and some of which most people have no idea.
Appraisers will even go as far as to look at past records to see what damages have happened to the property in the past. They will even look up old records just to make sure they weigh every little detail about that individual property.
Calculate Cost of Needed Repairs
Now that the appraiser has determined what the property’s current value is, now comes the estimated costs of repairs and renovations that will need to be done on the home. This is where the ARV formula comes in very handy. The actual ARV formula looks something like this:
Property’s Purchase Price + Value of Repairs/Renovations = ARV
There is also the 70% rule that is very helpful for people who fix and flip properties. The 70% rule is a guideline to help businesses make at least a 30% return on their investment when it comes to buying and selling homes. The 70% rule looks something like this:
ARV x 70% – Estimated Repair Costs = Max Purchase Price
So let us take a look at how these two moving pieces work. Example:
If a property’s purchase price is $200,000 and the value of repairs is $50,000 you can sell that home for $250,000 even when the actual cost of repairs will only equal about $25,000. For a house flipper that is a profit of $25,000 dollars. Using these formulas, house flippers actually make a decent profit.
Look for Comps
We’ve looked at how to calculate what repairs would cost and how that can benefit home buyers but exactly how do appraisers calculate what a home will be worth once repairs have been completed? That is where comps come in.
Comps are just a shortened term for the word comparables, which simply means comparable property. In order to understand what the renovated home would sell for an appraiser will need to go through the appraisal process again, this time pretending as if the planned renovations have actually been completed.
So they will need to base much of their initial estimate on whatever the planned renovations are and then will need to find homes that look similar to what the current property will look like once all of the renovations have taken place.
Finding similar properties in the area that have recently sold and looking at what they sold for is the best way to determine the market value for the property once it has undergone renovations.