ARV: After Repair Value
ARV: After Repair Value
ARV Meaning
What is ARV?
For investors and developers looking into purchasing and rehabilitating a distressed commercial property to own or to flip, the After Repair Value or "ARV", is a metric that should be of particular interest. The ARV of a property represents the property's market value after any repairs, renovations, or improvements have taken place. If the ARV of a property is determined to comfortably exceed the acquisition, repair, and holding costs of that property, then rehabilitation of the project is assumed to be a sensible investment. If the ARV is a less suitable figure, then an investor may be able to save both time and money by either bidding lower on the property or finding a more suitable property to rehabilitate. The ARV metric is a favorite among apartment property flippers with years of repair and sales experience under their belts, as they can easily estimate the value of any project.
How to calculate ARV
The ARV Formula:
ARV= Property Purchase Price + Value of Renovations
Wherein the property purchase price is defined by the dollar amount the investor purchased the property for, and the total renovation cost is the value of renovations made or an estimate.
How ARV Works in Commercial Real Estate Financing
ARV is best understood when it can be observed in practice. Take this example for consideration:
If an apartment building is purchased for $800,000, another $200,000 is spent on repairs, and there are holding costs of $40,000, then the combined cost of the property would be $1.04 million. If the investor of this property wanted to determine whether the property is a good deal or not, then the potential ARV is what should be considered. In the best case scenarios for investors, the total cost of the property should be 75% or less of the ARV.
The reason for this is that most lenders won't refinance a loan at more than 75% of a rehabilitated property's ARV. Taking a deeper dive, since many investors leverage a combination of hard money loans and bridge loans to finance a rehabilitation project, they typically strive to get refinancing for the full cost of the project once the rehab is completed. So, using the figures presented in the example above, an investor would be able to surmise that the minimum ARV to qualify for a $1.04 million refinance would be around $1.39 million.
$1.04 million/0.75= $1.39 million
What this means is that if the ARV of the property is calculated at $1.39 million, the investor can refinance and use the proceedings to pay off the entire hard money loan, and any repair expenses and holding costs due.
After Repair Value (ARV) Limitations
For all of the insight that an ARV calculation can provide, ARV is more or less a time sensitive calculation. The value of the target property is only truly valid when considered under the current housing market conditions in accordance with the property's state of rehabilitation at the time of calculation. These factors enable this value to fluctuate throughout the rehabilitation cycle.
The normal fluctuations of the housing market causes the values of comparables to go up or down. Renovation costs -- as we've seen throughout the covid 19 pandemic -- vary depending on market costs, macro economics, and more minutely, the damage found. The total renovation cost may be valued less or more than estimated.
Appraisals present an interesting problem regarding ARV as well. An appraiser might value certain property aspects differently than an investor or realtor would, depending on the appraiser and the appraisal method used. Considering that lenders typically want an up-to-date appraisal, this can result in losses for the investor if the appraisal of the property turns out to be less than what was estimated.
Investor returns can also be impacted by their ability to negotiate an appealing purchase and selling price for the transaction. Even If they can precisely estimate repair costs, if the price negotiation doesn't work out to be particularly beneficial, the investor stands to lose large amounts of money to potential buyers if the appraisal value is estimated to be lower than the potential ARV.
Related Questions
What is the difference between ARV and market value?
The After Repair Value (ARV) of a property is the estimated market value of the property after any repairs, renovations, or improvements have been made. This is different from the market value of a property, which is the estimated value of the property in its current condition.
For example, if a property is purchased for $100,000 and the estimated cost of repairs and renovations is $50,000, then the ARV of the property would be $150,000. However, the market value of the property in its current condition would be lower than the ARV, since the repairs and renovations have not yet been made.
How is ARV calculated for apartment loans?
ARV is calculated for apartment loans by using the following formula:
ARV = Property Purchase Price + Value of Renovations
Wherein the property purchase price is defined by the dollar amount the investor purchased the property for, and the total renovation cost is the value of renovations made or an estimate.
For more information on ARV and how it works in commercial real estate financing, please see this article and this article.
What factors are taken into consideration when determining ARV?
When determining ARV, the following factors are taken into consideration:
- Current housing market conditions
- The property's state of rehabilitation at the time of calculation
- The value of comparables
- Renovation costs
- Appraisal methods used
- The investor's ability to negotiate an appealing purchase and selling price
For more information, please refer to this article.
What are the benefits of using ARV when applying for an apartment loan?
The benefits of using ARV when applying for an apartment loan include:
- Most lenders won't refinance a loan at more than 75% of a rehabilitated property's ARV.
- Leverage for most agency loans goes to 80%, with up to 75% for cash-out refinances, which is slightly more generous than most banks or CMBS lenders.
- Agencies generally offer long amortizations (with lots of flexibility), and some loans even offer fully-amortizing options.
- Rates are typically quite low with this type of financing, as the risk for lenders is somewhat limited.
What risks are associated with using ARV when applying for an apartment loan?
When using ARV to apply for an apartment loan, there are a few risks to consider. First, the ARV of a property is an estimate and can be difficult to accurately calculate. This means that the loan amount may be higher than the actual value of the property. Additionally, most lenders won't refinance a loan at more than 75% of a rehabilitated property's ARV. This means that if the ARV of the property is calculated at a lower amount than expected, the investor may not be able to refinance and use the proceeds to pay off the entire loan.