What Is After Repair Value and How to Find It?
Are you ready for another snippet of “secret” sauce from your Real Estate Rockstar, Bill Twyford? Today we sat with him and talked about how you can go about evaluating a property for its “ARV – After Repaired Value”. Bill told us that there are really 3 ways to go about doing this. Let’s break these down and see how they would help us.
What Is (ARV) After Repair Value ?
After Repair Value (ARV) is a cornerstone concept in real estate investing, crucial for determining the future value of a property post-renovation. ARV represents the estimated market value of a property after all necessary repairs and upgrades have been completed. This figure is essential for investors as it provides a benchmark for potential resale value, helping them make informed decisions on whether to purchase, how much to invest in repairs, and ultimately, the expected profitability of the property.
Understanding ARV requires a comprehensive analysis of the property’s current condition, the extent of necessary repairs, and a thorough evaluation of comparable properties in the same market. By mastering ARV, investors can strategically plan their investments, ensuring they maximize returns while minimizing risks.
Why ARV Is Important for Real Estate Investors
ARV is a critical metric for several reasons. First and foremost, it helps investors avoid overpaying for properties. Without an accurate ARV, investors might pay too much for a property, leaving insufficient room for profit after renovation costs are accounted for. By estimating the future value, investors can determine a suitable purchase price that allows for a profitable margin.
Additionally, ARV is vital for securing financing. Lenders, particularly those offering rehab loans or hard money loans, often base their lending decisions on the ARV of the property. They want assurance that the property, once repaired, will be worth more than the loan amount, providing a cushion in case of default. Therefore, a well-calculated ARV can significantly influence the amount of funding an investor can secure.
Moreover, ARV is instrumental in budgeting for renovations. Knowing the potential resale value helps investors allocate their renovation budgets wisely, ensuring they spend enough to maximize the property’s value without over-improving and reducing their return on investment. A well-balanced renovation plan, guided by ARV, ensures that every dollar spent contributes to increasing the property’s market value.
Evaluating Through Comps
The first way to evaluate a property is through “comps”, the MLS. This is by looking at the property and comparing it with properties that are of similar size, location, and age that have sold. A distressed property, though, is not a like property, though. Is the homeowner going through a financial struggle? A divorce? That home may have been sold under market for a quick sale so that the homeowner could get out from under that burden. That would not be a property that you would look at as a seller, but you definitely would want to pay attention to those as a buyer because of their lower sales price.
Calculating ARV with Replacement Costs Method
Second is through the replacement cost. If you were starting from scratch, what would it cost to buy the land plot? What would it cost you to build the house? What would it cost to have the home completely finished and ready to be put on the market? When the market is going up, the replacement cost is going to be cheaper than the price the house is selling for. This is why you will see a lot of builders building speculation houses during that time. When the market is going down, however, you’ll notice that the replacement cost is higher and it is cheaper to buy a home than it is to buy one brand new.
Evaluating ARV Through the Income Approach
Thirdly is using the income approach. This is looking at what the property brings in as rent cash wise in comparison to what it costs. This is popular for rental properties, subject-to, multi-families, duplexes, triplexes, etc. What does it bring in, what are its expenses? Expenses you will want to keep in mind aren’t just the cost of buying the properties, but also the costs of your property management, repairs, insurance, taxes, and the like.
A profit of 2% a month is a great number gross. This would look like having a 100,000, you will want 2,000 a month gross. Take out your expenses from that and you really want to have you home takeaway to be 1%. That 100,000 property should bring in 24,000 each year, gross. Keep the math simple for your self!
Secret Formulas vs. Proven Methods
If you were to do a google search on calculating ARV, you will find a multitude of “secret formulas”, but these 3 ways won’t cost you a dime to look at, and are proven to work! If you have the time, look at the property you are interested in from all three of these angles. Look at what has sold in your area that is comparable, look at what the cost of the property would be should it need to be replaced, and look at the property’s income potential. Once you have those evaluated, take the time to think it over and to decide if the property is worth your investment!
Multimillion Dollar Homes and Rebuilding Costs
It is mind boggling how often multimillion dollar homes sell for far less than what it would take to rebuild them! It is not hard to find a 50,000 square foot house for sale for 22 million dollars. You could NEVER rebuild that home for that cost by the time you figure in the labor, materials, and other associated fees. When you are looking at a property like that, it is a safe assumption that it is a property in distress and a great deal to be had. As funny as it sounds, when people are running away from the market, as investors, that is our time to run towards it! In real estate investing, it sometimes finds that the best investments are the ones that are the opposite of what everyone else is doing. If you are doing what they are doing, you are going to get what they’ve got.
Considering Properties That Shine in One Area
You may find that a property that you are considering only shines in one of these three areas. Does that mean it is a bad investment? Absolutely not! If a property shines in even just one, it is something that is worth considering. A situation where we have found this to be especially true is when we have worked with homeowners in “subject-to” deals. What kind of deal is that? A subject-to is when the mortgage is still under the owners name, but our name is on the deed. In these situations, it isn’t uncommon to have what is owed on the home be a bit more than the value of the home on the day the deal is made. This is a great source of income, though!
Insurance and Replacement for Commercial Buildings
If you are investing in a building though, you definitely will want to have enough insurance to cover replacement! This is because oftentimes commercial buildings can be purchased for a great price, but the cost to replace can far outweigh what the price paid was. It can still be a great deal, though, because it can be turned into a steady stream of income. You can rent out spaces, you can open your own business, or, you can fix it up and turn around and sell it for profit.
Conclusion
Not every deal needs to be a slam dunk! If you take the time to look at the properties and find out if it can be cashflow for you and a way out for the homeowner, I call that a win! Sit down, look at the numbers. Every deal is going to look different, and not every deal needs to be complex or bring in top dollar. If your properties can work for you to bring in cash flow, you are going to feel good about the deal! When you are looking at real estate it is worth looking at, not the instant gratification, but the long game of what that purchase of what will come to you during the time of appreciation. Flipping houses is popular right now, but be willing to be in it for the long haul and you won’t be able to go wrong!
For more personalized advice and consultation on real estate investments, visit our website Dwanderful or book a call for your consultation. Our experts are ready to help you navigate the real estate market and make the best investment decisions.
