Understanding After Repair Value (ARV)

In today’s real estate market, property investors look at specific ARV as the end-goal that their investment  property must reach.  However, in the last few years, it seems that this “ARV goal post” was in constant movement.  How do you reach a goal when they keep moving the goal posts?

2008 and 2009 were frustrating years.  As market values started to slide, the ARV that you’ve determined today would not hold by the time you acquire your property and had it rehabbed.  That $120,000 ARV that you’ve correctly determined in December, was no longer valid according to the bank by the following March.  In a matter of 2 to 3 months, when it was time to refinance or sell your property, the bank has determined that your ARV was actually now around $108,000 – a nice 10% drop!  A constant frustration.

What is ARV?  Well, it’s exactly what After Repair Value means, the value of your property after it’s been rehabbed and ready to be flipped or rented.  That’s the number that will determine your return on investment – of course assuming that your other costs have been accurate.

On our website’s list of available properties, in the information area for each property we wholesale to investors, we use the lowest priced comparable sale (comp) out of at least three sold properties.  We might even go a few thousand dollars under that, just to be on the safe side and to show a conservative monthly cash flow or net profit.

Often we receive questions from investors that they have looked on various online real estate websites, such as Trulia, Homegain, or Zillow and the value of the home we have is either too high or too low. Why they ask.

Well, it doesn’t matter what ARV Trulia states, or Homegain or Zillow or willow or schmillow.  What matters is WHAT DOES THE BANK SAY THE ARV IS.  And what the bank’s appraisers use to arrive at that number are comparable sales from the Multiple Listing Service (MLS), that can be provided by any licensed real estate agent.  True, online websites can get you close, but the bank’s ARV comes from comps.

The comp parameters for Philadelphia investment property is at least three (3) sales of similar property as the subject home (bedrooms, sq. ft., etc) within the past 6 months, within .3 of a mile of the subject property.  If they can’t find 3 sales, then the parameters are expanded incrementally.  For the Philadelphia suburbs, a greater distance parameter can be used.

Investor’s best bet is do your due diligence and look at your investment property as the bank would.