What is an ARV and How to Calculate It
Whether you’ve purchased a fixer-upper or you’re looking to make minor repairs on a property, you are in for a couple of benefits, including the ARV or after-repair value. It’s quite common for investors to put a certain amount of money into renovation before being able to flip the property or rent it out. Regardless how in-depth the renovation process is, you are going to deal with the ARV afterward.
What is an ARV
Most simply put, ARV stands for after-repair value and it means exactly that - the value of the property after you’ve put money and work in it. It’s obvious that your property will be worth more after the renovation process gets done. The question is, how does ARV work and what are a few things you should keep in mind while calculating it.
The ARV comes in handy when you’re trying to figure out how much you can get out of renovations on your property. You will need to calculate the ARV in advance in order to determine what level of renovations makes the most sense in terms of profitability. Besides, if you opt for getting a renovation loan, the mortgage company will rely on the final ARV, which is why it is critical to calculate it correctly.
How to Calculate the After-Repair Value
The formula for calculating the ARV is simpler than you think. All you have to put together is the property’s initial value and the value of renovations or repairs. However, there are certain things you should keep in mind to ensure the ARV is accurate as it can be.
Here are three steps to calculating the overall after-repair value:
#1 Appraise the Current Condition of the Property
To get started, you will need to know the exact value of the property based on its current, pre-reno condition. It’s best to work with a local appraiser to get an accurate evaluation of your property. The things that are going to matter when appraising the current condition of the home include:
the size of the home in square footage,
the size of the entire lot,
the number of bedrooms and bathrooms,
special features such as pools, garages, and basements,
the overall condition of the property.
#2 Analyse the Comparables
Comps or comparables are home sold in the same area that are similar to your property. They play an important role in determining the overall value of your renovated home. For instance, if you’re appraising a two-bedroom house, it’s price and condition will be compared to other two-bedroom houses that were recently sold in your area. In this sense, area refers to anything within a mile or two miles of your property (although this may differ depending on the location).
#2 Estimate the Value of Repairs
Lastly, once you get the general idea of the value of similar homes in the area, it’s time to estimate the value of the renovation process. Naturally, you’re going to need a renovation plan if you’re aiming for a renovation mortgage. The appraiser will use these plans to determine the overall value and expenses that you’re about to cover.
Keep in mind that the maximum loan amount is usually tied to the after-repair value of the home. That’s why you have to calculate the ARV in advance to be able to initiate the loan and renovation process.
Refinancing after an ARV
Once you have made repairs to the property, and it is worth more than the purchase price, you may be able to refinance and get some, if not all, of your downpayment and even renovation cost out of it. Sounds great, right?
Here some information to keep in mind when hunting down that refinance cheque:
In Canada, you can only get a mortgage for 80% of the ARV (ex. For a $200K ARV you can get a mortgage for $160K).
An equity take-out is also a form of mortgage refinancing.
You can only Refinance when your term is up (ex. 4-year fixed term or variable term) or you can break your term and pay a penalty fee, which is sometimes worth it.
Things to Keep in Mind
To tie things up, I want to remind you that it is important to remain realistic when calculating the ARV. Certain renovation projects add more value than others. It’s all about being strategic and finding the best reno projects and deals that can maximize your profit at the end of the day.