ARV, After Repair Value, for Real Estate Investors
Real estate investment takes many forms, some short-term and others for longer term rental property ownership. Many investors buy from other investors, some wholesalers and others called fix-and-flip investors.
• Real Estate Wholesaler - This investor usually sells to other investors, holding properties for a very short time. They make no repairs and do no rehab work. They usually sell either to a rental property investor if the property is ready to occupy. If it needs work, they sell to a fix-and-flip investor. Their value in the marketplace is their ability to locate properties they can negotiate down to a low enough price to quickly resell to another investor with a profit in the middle.
• Fix-and-Flip - This is a real estate investor who buys properties in need of rehab and repairs, usually significantly damaged or needing lots of work. They rehab the properties and sell them, usually to rental property investor, sometimes also selling in the retail market to normal buyers.
The evaluation of a potential deal for the fix-and-flip investor is complicated by the fact that rehab labor and materials are involved before the property can be resold. Also, there are often financing costs if the investor needs short-term financing to get the repair work done for resale. The fix-and-flip investor must know what the property will be worth in the marketplace after the rehab and repair work, whether selling at retail or to another investor.
The value of the properties after the work is known as the ARV, after repair value. The fix-and-flip investor must determine what that value will be and then figure out if they can buy and fix it with acceptable profit left in it for them at resale. The process of determining that market value is much like the one real estate agents and appraisers use. Real estate agents call their process a CMA, comparative market analysis. Here is an overview of how it looks:
1. Subject Property details - The agent gets a complete description of the property to be valued, including all features, characteristics, layout, number of bedrooms, baths, and garage type and spaces. This would also include lot details, especially if different than normal subdivision lots of similar homes in the area.
2. Gather Comps (Comparables) - Comparables are properties as similar as possible to the subject property and sold recently. Information on these is gathered by the agent. They are seeking three or more properties with as many of these characteristics as possible:
a. It has been sold very recently. If too long before, the price may not be helpful for this calculation.
b. It must be as similar to the subject property as possible. This means characteristics like bedrooms, baths, garage type/spaces, square footage, etc. It should also be in the same neighborhood or one nearby that is similar to the subject property's neighborhood.
c. For every difference in those characteristics, the agent makes an adjustment to the sold price of the comparable (comp). What they are doing is changing the sold price of the comp to account for differences in characteristics.
d. If one more bedroom than the subject property, it is assumed that the price must be adjusted downward by the value of a bedroom because it would have sold for less if the same bedrooms as the subject property.
e. If an extra bath or garage is present in the subject property, it would work the other way, in that the value of another bath or garage space would have to be added to the sold price of the smaller comp property. It would have sold for more if the same as the subject property.
f. Any other significant differences in the properties may require the adjustment of the actual sold price to make it more like it would have been if identical to the subject property.
Once all the adjustments are made to the comp properties' sold prices, a calculation is done to get the average sold price per square foot. You divide the sold price of each of the comps by their individual square footages to get a price/square foot for each. Then you average those numbers to come up with the average sold price/square foot for them all. Then you multiply the square footage of the subject property times that price to get the approximate value of the property.
The value arrived at in this process is the value of the home in the current marketplace if it is in good condition and not needing the rehab or repair work. Thus, it is the ARV, after repair value of the home. The investor can then see if there is enough in value to buy it, repair it, and make a profit in the resale.
Want to know the value of homes in a specific neighborhood. Request a Free Neighborhood Sales Report at www.neighborhoodsalesreport.com.