Attention Investors: 3 Steps to a More Accurate ARV

An Accurate ARV Is Critical For Investors

Accurate ARVFor real estate investors who are interested in buying and flipping houses for a profit an accurate ARV is critical. In this post, we are going to discuss what the After Repair Value (ARV) is and how investors can go about getting the most accurate ARV so their real estate investment transaction is successful.

What is an ARV? An ARV stands for After Repair Value. The After Repair Value is what your investment property would be worth after you make the repairs and renovations necessary to sell it.

Why is an ARV important? An accurate ARV is important for financing reasons. Unless you are able to purchase investment properties with cash, you most likely will need to get a loan to purchase the property and pay for the repairs and renovations.

A lender will need to know how much the property will be worth after repairs are made so they know they are loaning money on a good project. It would not make sense for them to loan more money than the property would bring after the property is purchased and the repairs are made.

For you, as the investor, it is important to have all your ducks in a row so that the ARV is the most accurate for the lender to make their decision. Having all of this information together and being accurate will help your chances of getting funding for your fix and flip deal.

I’m writing this article from an appraisers perspective on what you can do to get the most accurate ARV. Providing the necessary information to the appraiser will allow them to provide a more accurate opinion of value that will then make it possible for the lender to loan you the money you need.

Here Are 3 Steps To a More Accurate ARV

1) Provide plans if you are adding square footage or reconfiguring the layout- If you are adding square footage, or converting unfinished area into heated and cooled living space, plans will assist the appraiser in calculating accurate square footage. Professional blueprints are not necessary, however, an accurate hand-drawn layout with dimensions is very helpful.

Knowing accurate square footage will help the appraiser when comparing the property to the comps. In addition, it will help to determine how functional the floor plan is.

2) Provide accurate cost estimates- Accurate cost estimates are important to the appraiser because it helps them to determine replacement costs. The cost approach is not always the most relevant approach to value, especially in older homes, but when rehabbing a home to like new condition in can help provide a reliable indication of value. Cost estimation tools such as Marshall & Swift do not always reflect local costs so having an estimate from a local contractor is helpful.

It’s important for the cost estimate to reflect the market rate for the work. I mention this because a lot of investors may do the work themselves and their cost may be lower and not reflect what it would cost if you had to go out and hire a professional to do the same job. They can still do the work themselves but the cost estimate should be market rate.

3) Provide accurate specifications- A list of specifications that provide materials of construction and the scope of work to be done helps the appraiser produce an appraisal that more accurately reflects what the property will be like after renovations.

If you are making changes to the interior layout it’s important to let the appraiser know. The open floor plan concept is very popular now and if you are purchasing an older home and plan on taking out walls to open it up let the appraiser know this.

The appraiser’s jobs are to measure and quantify the market’s reactions to the home you are renovating. Floor plan design and layout is noticed by buyers and they are willing to pay for it.

You will most likely get different reactions from buyers when they compare two homes; one with an older closed feel with numerous interior walls and doors, and the other that has been opened up and provides a more modern feel.

These are the top three tips I can offer from an appraisers perspective to get the most accurate After Repair Value. Getting an accurate ARV will help the lender fund you the money to complete your project and make the greatest profit.

Questions?

Do you have any other questions about how to get an accurate ARV? Leave me a comment below and I’d be glad to answer it.

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Comments

  1. Thanks Tom. Great tips. I concur too. Having more details will help us be more accurate as appraisers. I find some investors are pretty vague. If I’m doing an ARV appraisal I like to ask for example photos of what an investor’s quality of work looks like. That really helps me visualize more what is really being planned.

    • Same here, Ryan. As they say, a picture is worth a thousand words. Having complete information and documents for support will defiantely go a long way to a more accurate ARV.

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