What is a Property’s ARV and How Do You Estimate It?
The ARV stands for the after repair value. In other words, it is the future value of a property once it has been repaired to its proper state. As such, it sees a lot of use by real estate investors who are interested in fixing and flipping because it provides them with a very rough idea of what they might be able to get from their real estate investments.
How Can You Estimate the ARV?
Unfortunately, the ARV is one of those figures that sound very easy to calculate but can use up a huge amount of time and effort. Something that is particularly true if interested individuals want to come up with a reasonably accurate number, which is hopefully all of the real estate investors who are interested in fixing and flipping real estate properties out there.
In short, the formula of ARV is the purchase price of the property plus the value of the repairs and renovations that are made to bring the property back to its proper state. As such, the first component is very easy to calculate. After all, it is the price that the real estate investor paid for the property, which is the fairest way of calculating its value on the real estate market at that point in time. Unfortunately, this isn’t a very practical solution for people who are evaluating potential investments, meaning that in most cases, it is a much more complicated matter. Meanwhile, calculating the second component is no better because it involves even more guesswork.
Speaking bluntly, the best way to calculate the after repair value is to consult a professional appraiser. Yes, interested individuals can do a fair amount of necessary work on their own. However, professional appraisers have the expertise and the experience needed to ensure more accurate results than otherwise possible, meaning that they should be entrusted with such tasks because that is what they specialize in. With that said, it can still be very useful for real estate investors to get some idea of what needs to be done because that should help them get a better understanding of real estate investing as a whole.
First, the process starts with coming up with an approximate value for the current value of the property, which often involves looking at similar homes in similar conditions in similar neighborhoods. Some examples of details that are worth looking into include but are by no means limited to the property’s location, its accessibility, its amenities, its layout, its measurements, and the kind of terrain that make up its lot. Coming up with an approximate value is something that should always be done when looking through potential investments because it is an absolutely critical part of figuring out whether it is worthwhile or not.
Second, there is the matter of figuring out what the potential investment’s value could be once it has been fixed up, which should start with figuring out what needs to be fixed up. Once again, interested individuals should be calling in the professionals to look through the property to make sure that they find everything of note, which should provide them with a good idea of what repairs and renovations they will need to make to bring it into a proper state. Once that has been done, interested individuals can then proceed to coming up with estimates for both the cost and the value contributed by each of those repairs and renovations, which should tell them whether their projects will be profitable or not.
Third, interested individuals can’t count on the reliability of their estimates 100 percent because the fundamental nature of estimates is that they are nothing but estimates. As such, it can be a good idea for them to look through recent real estate market sales for similar homes in similar conditions in similar neighborhoods for the future state of their potential investment. This way, they can get a second opinion about what the property’s after repair value could be, which should enable them to make a decision on somewhat firmer ground. After all, if both of their estimates produce similar sounding figures, their accuracy is a bit more believable, though still far from certain because both of them can still be very far off of the mark. Still, an increased measure of accuracy is still much better than nothing at all, which is worthwhile making use of both methods for increased reliability.
