Appraisal Value vs ARV

Tim Ivory · 2020-04-02T03:18:13-07:00

Sometimes its tricky finding answers to very basic questions but I need to verify that an appraisal report is usually the current as is value on a property, is that correct. Is an appraisal the minimum current value on the property? The house appraised for 140K but needs 40K of work with sparse comps, so its not clear cut what the ARV on this is. Just because a property is appraised at 140K and I put 40K of work into it, doesn't mean its ARV is 180K, correct? Heck, even if I put 200K of upgrades in it, the property won't be worth 340K. Very clearly, an appraisal is the current AS IS value of the house. It is worth that much despite the roof leaking etc, right. An ARV is an entirely different ballgame, right? Or, is the answer to these questions specified in each of the reports and it could vary, sometimes its the AS IS value and sometimes its the ARV?

Douglas Mcqueen

Rental Property Investor · Virginia Beach, VA (Virginia Beach) · Member since 2019 · 173 posts · 129 votes

6y

@Tim Ivory You are correct the appraised value is the value at the time of the appraisal, in the condition it was appraised. The ARV is the projection of what the value will be once the repairs are complete. ARV is a little science and a little magic so to speak, typically you arrive at the ARV based on COMPS(science) and your market knowledge (Magic). Simply putting $$ in does not directly relate to ARV so again you are correct 140K house +200K in upgrades and repairs does not equal 340K ARV. To arrive at the ARV much like an appraiser uses comps to determine value you have to compare what you have to whats around, you are looking for like houses in like condition the closer you can find in build and finish and distance the closer their value should tell you what you can expect to see as far as ARV goes. With no comps you have to rely on your market knowledge of the area.

If you are having trouble reach out to investors in the same market, talk to some flippers and or Realtors they should have a pretty good idea of what the home would sell for in that particular market and usually as long as you approach them correctly and work to establish a relationship with them they will generally share this knowledge.

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Kenneth GarrettPro Member

Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes

6y

@Tim Ivory

When I employ the BRRRR method I look at my calculated ARV after repair number. There are repair numbers that don't benefit the appraisal. If you have a number of code violations with electrical wiring, it's need to be repaired, but in general does not provide any value from an appraisal or ARV it just needs to be corrected. A kitchen remodel will give you a great return on your investment. When calculating ARV you are projecting what the appraised value will be based on comps. This is a factual, but a projected value. Don't over analyze if the comps don't support your ARV; don't use them. Be realistic with your numbers.

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Greg ScottPro Member

Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes

6y

Let's backup a bit.

Remember that houses are valued using Comparative Market Analysis. An appraisal is really a tool for the bank, not the buyer. The bank uses an appraisal to make sure they are not putting their money at risk.

You, like an appraiser, can use different assumptions to derive an estimate of value. I've done several deals with significant rehab where we asked the appraiser to provide two estimates of value. The first was value in current condition. The second was the value after we make our planned repairs....in other words ARV. If your lender accepts the ARV appraisal, you know before you start your rehab exactly what your Bank thinks is ARV.

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Tim Ivory

OP

Morristown, TN · Member since 2017 · 200 posts · 22 votes

6y

Thanks guys. That clears things up perfectly :)

So we have a few things going on. We have an appraisal, and ARV, and potential Market Value and all three could be different. The bank and realtors could all agree the ARV is 100K, but if there is high demand and multiple buyers, the house could sell for 130K, so its actual value could be anything. It's good to keep this idea in mind, but for all intents and purposes, assume it'll be slightly lower than the ARV would be safe.

The tricky part is, even if there is high demand on the property, what lender would go for paying 30K above the appraisal and project ARV? So in essence, perhaps what the the threshold banks would agree to loan is the more closer to the true market value, if the buyer doesn't use there own funds, but I digress.

Thanks guys.

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Tim Ivory

OP

Morristown, TN · Member since 2017 · 200 posts · 22 votes

6y

What do you guys think of buying your first fix and flip in this environment? Is it too risky? Should I add a 5-10% margin of safety in my loan to value for a HML. This is probably a good question to ask my lender, direct from the horses mouth, haha.

Cheers

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Tim Ivory

OP

Morristown, TN · Member since 2017 · 200 posts · 22 votes

6y

How serious should I take the cost approach to value of building the place new in today's currency and how does that potentially relate to a projected ARV?

The AS IS value is 140K and the Cost approach value is 202K, while still the ARV is unknown. Furthermore, without clear comps, I wonder if a HML will take my word or a local realtors hunch feeling on the loan, haha, so perhaps, no comps means no deal, despite how good the deal could potentially be. That's how I'd play it as a lender anyway.

Furthermore, it's a bit unclear how the depreciated value here comes into play. It says 104K in depreciation and 112K for cost of improvements, yet it doesn't subtract that amount, but settles at 202K for indicated value. Can someone explain these bits?

Cheers

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Whitney HuttenPro Member

Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes

6y

@Tim Ivory if this is your actual appraisal, there should be a line that consolidates all 2 or 3 approaches the appraiser used to determine the value. It's that number you and the bank will be using for the refi. So don't get too excited if you see a higher number on the appraisal.

Essentially, the appraiser is adding up the cost of the land and all improvements, then depreciating the costs of improvement over time (when last done) to arrive at a value. That is way over simplified. But this is why you can't use that number... It goes back to what Douglas said... $140K + $200K doesn't equal $340K. You are at the mercy of comparables with 1-4 unit investing.

You can contest an appraisal if there are clear errors (wrong room, bathroom, or square footage counts) or poor comps were used. However, the appraiser does not have to move the value either. Here is a guide to survive a BRRRR refi.

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Joe Cassandra

Rental Property Investor · Woodstock, GA · Member since 2017 · 517 posts · 772 votes

6y

You'll find appraisers appraise differently depending on the appraisal...

:)

In a hot market...like your example...if the house is listed at $200k, but sells for $230k...if you can give any sort of proof it's worth $230k to the appraiser, you could probably get it to pass. ( a good seller's agent will do this for you).

For a refinance, appraisers are going to come in much more conservatively. Don't know why. Maybe there's less on the line (appraisers probably hate to blow up deals with a bad appraisal). Plus, they get paid no matter what.

For a standalone appraisal a homeowner requests, I've heard stories of appraisers showing up with a sheet marked "zestimate" printed from Zillow :). Because there's nothing on the line for them, they'll probably give you somewhere within what Zillow gives you and call it a day.

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Appraisal Value vs ARV

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