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Most great investment properties need some repairs. This is what makes them a value to buyers and such a great deal when they are sold after the repairs. But some properties don't look so great even after repairs. That is why before you decide if a property is a great deal to wholesale or invest in, you need to calculate the after repair value, also known as ARV. If you don't have some kind of estimate as to how much the property is worth after it would be repaired, you could be losing money instead of making a profit on your investment.
Appraisal vs. ARV
When you speak to a seller about an investment property, they will probably tell you the appraisal value. This is usually important to real estate agents trying to sell a home through an MLS listing. Appraisal deals with the highest and best use of the property for what is "legally permissible." For example, a home may be perfect for a professional office but is zoned for residential. You can't have the property appraised based on how much the property would be worth if it was zoned for office space.
Appraisals are used primarily for tax purposes. Since appraisals can be costly and take time, many investors, particularly wholesalers, don't have them done. Investing often requires quick sales. Estimating ARV takes less time and is easier to calculate. Here's some advice on determining ARV:
• You should find the properties around the investment property that are comparable. The challenge is that more than likely, not all of them will be the exact same. In homes, look for house with about the same number of rooms and features. Based on the values of these homes, which may be in certain states of repair, you can calculate the ARV value easily.
• Finding similarities in commercial properties and multifamily properties is more difficult but remember that finding the ARV is not an exact science. When you can't find a property that is similar, many investors use a formula that compares the price per square foot. Let's say you have identified four properties that are somewhat similar to the one you think is a good investment. Take the selling price and divide it by the number of square feet to get the price per square foot. Add those prices together and divide by four to get the average price. This should give you an estimate, but not the perfect ARV.
• Consider all the variables when trying to figure the resale value of a property after repairs. These include, but are not limited to:
1. The zoning of the property. Make sure before you tell a buyer that he can split that big home into apartments that the zoning allows multi-family residences. Most buyers will check the zoning before purchasing the property but don't assume they will do this. Be up front with them.
2. The neighborhood. The area may look bad now, but are their plans for improvements? What is the crime rate? Has crime increased lately? On the other hand, has the neighborhood received any government grants to improve the area? Talk to neighbors, if possible.
3. Are there any tax liens on the property? This could be a major problem. You can find out at the county courthouse. Don't just trust the buyer to tell you. Look it up for yourself.
Why ARV is Important
The consequences of not knowing the ARV could be devastating to your career as an investor. The biggest consequence comes if your buyer feels that you misrepresented the value of the property in any way. For example, you tell your buyer that the ARV is a certain amount. The buyer fixes the property only to find there were other variables such as declining property values in the area. Do your homework before trying to sell the property.
Finally, not having a grasp on the value of a property affects your pocketbook. The more you know about a property, the easier it is to determine how to market it and who your potential buyers are. This knowledge will lead to more sales which will lead to more money in your pocket.
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