What Is The After Repair Value (ARV) and How To Calculate ARV for Real Estate
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January 31st, 2024
What is the After Repair Value?
The After Repair Value (ARV) primarily forecasts the future price of any property after undergoing any kind of repair. After Repair Value is not the price of a new property, but the price of the property after re-furnishing or making some improvements to an existing property. It is used by a person who buys any sort of property, makes necessary improvements to increase its efficiency within a period of a year, and then sells it off.
Any property, after going through repair or any improvement, includes the price of the original property and the consequent cost of refurbishment. The value of the property and the cost of repair are used to predict the future price of the property post-repair you can refer to a sample commercial lease agreement. The investors should know the future price of the property after investing in repairing as it will be beneficial for them to evaluate whether they will be earning any profit or not after spending on the repair work.
Read also – Types of Commercial Leases
The calculation of ARV can be affected by the presence of various factors. However, the two main components that are necessary to find out the ARV are the property’s price at the time of purchase and the cost incurred/ investment in the repair work of the property.
ARV = (Purchase Price of Property) + (Cost incurred in Repair)
The following steps can help you calculate the ARV of any property
The aforementioned process is explained in detail below
3. How to Estimate the Current Value of the Property?
The current value of any property should be valued by a professional appraiser to ensure that the correct value is calculated. Services of certified websites can be employed to find out or compare the value of the property with other properties in the market. It is imperative to collect maximum information like flood certification on the property so that the best price or value of any property can be determined accurately.
4. How to Find the Estimated Repair Cost (ERC)?
After assessing the current value of the property, estimate the cost of repairing the property. This step is very important as it engages with the investment post initial purchase and determines the very fruitfulness of the investment. After Repair Value is basically the sum of the purchase price of the property and the cost incurred in repair and hence, one needs to figure out the cost of repair in order to get a good profit after selling the property.
Read also – GRM in Commercial Real Estate
5. How to Find out the Value of Comparable Properties?
The next step to be undertaken, after the repair of the property, is to compare the price of similar kinds of properties within the same locality. One needs to assess whether the value of the property is worth the price and if it is more or less equivalent to the comparable properties same as comparative marketing analysis. The ARV should be similar to the properties that are being compared. If the value of the property is less than the value of the comparable properties, then there are either chances of errors in the calculation, or it is a sign of wrong investment.
ARV is required in order to make a proper repair and regulate renovation expenses such that the property can attain a reasonable profit. ARV is extremely crucial for investors who are engaged in this kind of business as it gives them an indication on whether to invest or not in select properties. It is also used by the investors who rent their property after repair so that they can gain good rent as returns.
There are multiple approaches in the estimation or calculation of ARV, but the best way of finding ARV is by employing the 70% rule, a barometer used while purchasing distressed property in hope of later profits differentiates between modern home and contemporary home design. This method of calculation would be particularly helpful for flip-flop investors to estimate the future value of the property that is to be sold, and would, in turn, motivate them to invest more in such properties where they can gain sufficient returns.
The 70% ARV rule is used to find out the maximum bid price of any property. The rule bids the 70% price of the expected selling price post deduction of the repair cost, hence ensuring that there will be returns of around 30% for the investors.
Best Bid Price = (ARV x 70%) – ERC; where ARV is the After Repair Value and ERC is the Estimated Repair Cost
The best way to estimate the future value of any property is by using ARV. The data collected and information gathered need to be accurate and genuine to ensure the calculation of the correct value. If the future properties’ value can be accurately estimated, it will enable the investors to invest accordingly in any property.
Read also – How to Calculate Commercial Rent?
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