ARV: How's It Calculated

This is how I view the difference between ARV and FMV

ARV is the move in ready value.
FMV is the as is current condition value.
The difference is the rehab needed to get it move in ready.

I determine the ARV by having my RE agent pull comps & I have them filter the comps to show only the financed sales.
That is a home-buyer buying the home to live in; move in ready.

“After Repair Value” (abbreviated ARV) is the real estate investor’s equivalent to fair market value (FMV). It’s no secret that the vast majority of discounted properties are abandoned junk properties, vacant properties or fixer uppers.

They are often properties that need repairs to be returned to the fullest profitable use. As a result, investors have found that they must know the difference between the “as-is” value of a desired property, and the value we expect a developed piece of real estate to fetch on the open market after it has been completely fixed up.

This open market value “after fix-up” is known as the ARV.

After Repair Value Vs. As-Is Value
As an investor, your initial concern should be,”At what price should I pay to acquire this property?”

That’s your As-Is Value.

In order to renovate and re-sell your houses you need to estimate ARV to determine expected profit after covering costs (acquisition costs, holding costs, and soft costs). This concern should quickly follow in your though process.

The ARV and As-Is Value are all estimates used for analysis and decision making. But, they are not set in stone…(and they are certainly neither “fair” nor “unfair”).

Steps for Estimating After Repair Value

As an investor, we want to understand the analysis needed to estimate after repair values. Here are a few tips:

* Use sales figures from home sales not listing (asking) prices. At InvestorCompsOnline a report will give you these real estate comps not listings.

* Compare home sales figures of directly comparable properties in the same subdivision or very nearby; typically within a mile.

* Get rehab estimates from about 3 licensed general contractors – each component must be clearly itemized.

* Use supplies and parts cost estimates from the big box stores – Home Depot,Lowe’s and Sears.

The first two points let you know what you can expect to sell the property for after it’s been renovated (ARV). The last two points have more to do with determining how much you want to pay for a property (As Is Value) you intend to rehab, by factoring out expected repair and other costs.

Randy Bailiff
Dean Graziosi Life and Investment Coach

Thanks again, Randy:

Of course, FMV is not, "Set in stone," either. I have one property that I'm having to drop the price on by $7,000 to get it to move.

It seems to me that many properties are sold "as is" rather they have a FMV estimated by the realtor based upon comps just as houses are that have an ARV established by by the owner/investor. Many owner/occupant sellers are just not willing to do anything to help their property sell except for clean and mow the grass if they even do that. If I were to buy a property to live in myself, I would want to buy from an investor, because they have done some things to fix the place up some, or I would want to buy new.

I digress.

I suspect that ARV is often lower than FMV would be on a same property. The reason being is that the investor may want to put a soft price on the house (price below FMV) in order to get a quick sell whereas owner/occupant type sellers are often trying to get top dollar. In other words, ARV may not necessarily equal FMV or top dollar or what we call in Texas "highest and best price."

I was really speaking of "after repairs," Harold. FMV can be one thing before repairs are made and something totally different after repairs are made. It seems to me that ARV is a future value after repairs are made and a property can have one FMV at the time of purchase by the investor/buyer and another after the repairs. The FMV and ARV may or may not be the same after the repairs depending on whether or not the investor is trying to get top dollar/highest and best price or is wanting to put a soft price on the property after repairs for a quicker sale.

In other words, simply put, the property has an FMV both before and after repairs, but it only has ARV after repairs hence the "AR".

I think we agree, we're just saying it in different ways.

To answer my own question, the ARV is an estimate by the investor. Of course, it's an educated guess, too, just like the FMV is.

THANK YOU, RANDY!

BUMPERS!

This is a great discussion about determining the market values of properties. I have one question to add though. How do tax assessment play in determining a properties value? I've always heard to ignore the tax assessment, but never told why.

{J}

Hi everyone, have been reading the post and actually woke up this morning pondering the difference. It makes sense and I am taking note of both definitions. I recently met with a foreclosure RE agent and she basically said the same thing. She showed me a listing of the foreclosed homes going up for auction. The last column was the FMV before she bid on the property or even saw what repairs might be needed. The after repair value ARV was the value of the property after figuring in the amount of repairs that were needed, what she actually spent. I'm trying to make this clear in my mind. How'd I do?

A house is going to have a FMV both before and after the repairs, and, of course, the FMV would be higher after the repairs.

Since the ARV is an estimate and reflects what the investor/re-seller is wanting to get for the house after repairs, ARV and FMV may not equal one another after repairs. Some people will try to get full price (FMV) for the house after repair, and others will put a soft price on the house in order to sell fast.

Basically, ARV is just a factor in a formula. It's a way of calculating how much you're willing to spend on the front end based upon how much you want to get out of the deal on the back end.

JDubb brings up the tax appraised value, and that's not really worth much in calculating a deal for flipping, however one needs to consider it for buy and hold/rental properties when calculating return on investment (ROI). The higher the property tax on a property, the lower one's ROI is going to be. In other words, if you pay $50,000 on a property (or whatever), and you rent the place out for $350.00, $50.00 of what you take in rents has to be paid out in taxes, so that reduces your return on the $50,000. Of course, if you live in a very high tax area and the property taxes on that property $150.00, you might think twice, because then your ROI would only be $200.00 monthly. Of course, if you had to make a payment each month or your other costs exceeded $200.00 you wouldn't have any ROI or you might actually have a negative ROI.

I have found in my practice recently that tax appraised value has come out pretty close to FMV, but that certainly wouldn't be true in all towns or even all neighborhoods in my town. Realtors sometimes use tax values just to get a ballpark figure of where to start when calculating an FMV. There may be a huge gap between the two, are there may not be one at all.

In other words, if I were going to calculate the FMV or ARV of a house, the first thing I would do is go to the tax assessors Web site and see what they think the house is worth. Of course, there's other good information there like square footage and owner information, but we're talking about values. At least I would know rather the house is worth $120,000 or $160,000. Of course, being a realtor, I have a basic idea of what houses are worth in a given neighborhood off the top of my head.

Let me give you an example I was looking at a minute a go. I got a lead of a guy today that had inherited a property, and he wants $12,500 for it. I know that it's not in a good part of town simply by looking at the address. The first thing I do it go to the tax office's site, and they say it's only worth $3500, and I think that's probably HIGH. Even if the guy would take $2500 for it, and I estimated the value to be at $12,500 like he did, you see there's $10,000 difference there. There's probably $10,000 in repairs that need to be made, if I could even resell because of the neighborhood, so I can tell at a glance in a few moments that this is not a good deal to flip (or rent or list).

Hey Rick,

I'm looking into a potential deal but am having a tough time with the comps. This property is in a newer subdivision. One half of the subdivision is selling for $300-$500K. The other half is $175-$215K. Subject prop is in the lower half. Tax assessment is at $238 but the last true comp sold(12/2011)for $215K. A bigger prop sold in 6/2012 for $305K. Prop next door is listed at $199K and has been reduced 3x from $223. A foreclosure was just listed at $175K. Any ideas as to what to the FMV would be? The driveway needs to be paved(gravel) and replace the double sink in the master bath are the only things needed.

Talk later...

T

I understand what you are saying, but there are a lot of new people here trying to get a basic understanding of these terms and I think you are making it more difficult than it has to be.

When I went to a Wholesale Boot Camp I asked the trainer the difference. He told me basically what Harold says above. FMV (Fair Market Value) is what the house would be worth the way that it is right now. It may be perfectly fine to live in but possibly hasn't been updated as far as kitchen and bathrooms are concerned. Maybe is a little worn.

The ARV (After Repair Value) is what it would be worth after everything is updated and nice and shiny new. Doesn't have to necessarily be top of the line everything but equivalent in what the ARV of the particular area would be.

Best to just keep it simple. Things can be so overthought and so overexplained that people are more confused than when they started.

I know you just enjoy what you are doing and you like to draw people in to deep discussions. Nothing wrong with that. Just thought I would streamline it back down.

Karen

Nicely defined and very understandable.

Thanks for the neat description of FMV/ARV!

Trish

Look at Zillow, Trulia, Zip Data, for estimated values. Read Trulia's small print at the bottom of the page. And comparable sold homes, etc.

Then go to the exact County Assessor and see what they state is Market Value, or assesed at. Some of these just post the tax assessment, which is a percentage of their assessed Market Value.

Because we are in the investment business at some level-- any property, ideally-- we want a margin for profit.

Therefore, I sincerely believe the ARV should be exactly what the County posts as the Market Value-- remembering that in some counties across the country they tax at a percentage of their estimated Market value.

No matter how we crunch numbers, the county assesors will post what they feel market value is, and until that figure increases or decreases, that property will be taxed at that amount. Buyers know this.

So I honestly believe that the ARV should be exactly the same as the county says market value is, then invest and wholesale accordingly.

If the driveway is repaired, county assessor drives by , looks at notes--assesessment just improved, means a higher taxing amount. Inside make look like crap and in some cases actually at the border line of being condemnable.

In the majority of areas the tax assessment is set and reset ONLY when a sale is made on that property. Then it is based on that sold price. Many, many are never again reassessed unless they are requested to do so (such as when the bottom fell out of the market and values plummeted).

If someone had purchased their house at the top of the mkt for say $500,000, they are still assessed at that amt normally, unless the owner requests a reassessment. That is also why someone who purchased their home 35 years ago has such a low tax assessment. For this reason, these ARE NOT accurate numbers to use and you will end up losing your shirt if you base your FMV on them!

Counties just do not have the manpower to update these statistics.

The only way to get really accurate comps is by using SOLD comps gotten from MLS or a Title Company. (Be sure not to use "For Sale" comps but already "SOLD" props) They should ideally not be over 90 days old, and be within 1/2 mile of your property. Compare properties that are approximately the same size (plus or minus 10-15% in sq ft) and built within 5-10 years of each other. Should also be pretty similar in number of BR and BA.

It is really easier than it sounds.But you MUST have the proper comps. After doing a few, you will just whip them out in a couple of minutes.

Good luck!

Karen

Thanks for the answer to my tax assessment question. The main reason why I asked is because I would run into home owners that would question lower offers based on what their higher tax assessment. Now I know to ask them when their property was last assessed and explain to them why their property is not selling for the higher price they are asking. This way I sound more educated and professional.

{J}

Prospective sellers will do that, because that's the only value they know. They have not had an independent appraisal, and they certainly don't know what other houses have sold for in their neighborhood over the last 6 months (what FMV is based on). Tax appraised values are often high, because the taxing authority (county or state) wants the most taxes that they can get. The higher they appraise the house at the higher the can appraise their tax at. Obviously, a $150K house appraised at $170 will bring in more taxes than if it were appraised at $150K or below.

Ultimately, the only true value that matters on any product or service in any industry is how much someone is willing to pay for it. If you're hungry enough, and you like popcorn, you will pay $10.00 for a bucket of popcorn at a movie theater. But, if you hate popcorn, you won't pay anything for that product, because it has no value to you. It doesn't matter what the guy selling the popcorn thinks. You establish the value based upon what you're willing to pay. It's true of any product or service.

Another example is a service. If someone has a "special offer," where they'll clean the carpets throughout your whole house for $175, but you have no carpet...only tile, that service has no value to you. They price it at a penny, but you have no use for it, so thus there is no value.

Taking it back to houses, if someone has a deal that is not good for a flip (not enough profit margin, for example), it has no value to you, regardless of the tax appraised value, the ARV, the FMV or any other value.

You have to take more into consideration than just what houses have sold for, and I understand exactly what your saying. You can't compare 3 bedroom houses to 5 bedroom houses or 2,000 sq. ft. houses to 3,000 ft. ones. These are called adjustments when doing competitive market analysis (CMA). If you have to compare a 3 bedroom to a 4 bedroom, for instance, and your establishing a value for the 2 bedroom, you subtract a certain value for the missing bedroom, say $500.00. It varies based upon neighborhoods and cities.

Yeah, I get carried away. It's because I'm passionate about real estate!

Hey, look, I've surpassed 1000 points with this post! Yay me!

I think most of the time tax values are mostly based upon what the county or state needs to collect and the county's expenses. They really don't have much to do with the property, but there are factors that are considered as there are in any appraisal (value analysis). For instance, in one of the counties that I do business in, all tax appraised values were high, regardless of property, because the county needed funds. The neighboring county, the other 1/2 of the city, is exactly the opposite.

Comments like these are why this is a great resource for a Real Estate investing education.

Appreciate it!

Tom

As far as tax values are concerned, I don't care, I never even look. Totally meaningless to me. Could be high, could be low, could be right on. I DON"T CARE!

As an investor that wholesales to fix/flip buyers or does the fix/flip myself I look at rehabbed/remodeled comps period. I do not look at REOs, short sales, houses needing work. I DON'T CARE about those. I want to know ONE THING. What will my property SELL for with the level of rehab/remodel I estimate for the property. Appraisals mean nothing to me. I go by SOLD fixed up comps. I check LISTED and under contract comps to check my competition(other comps for sale in the area) and see what properties are listed at today. Does not mean they will sell for what they are listed for, that's why the bottom line is SOLD Rehabbed/remodeled comps. Average DOM is also critical information when doing fix/flips.

I then work my numbers backwards from the ARV that I determine. Two numbers are critical. Accurate ARV and accurate Rehab/remodel costs. When I have those down I then know what to offer on the property. This is how ALL my cash investor rehabbers look at the numbers also.

It is an art form that comes from evaluating many, many properties.

Michael Mangham
Mentoring/Team Building Nationwide
MD Home Acquisitions LLC

I agree with you, except in many (not most, wink wink) neighborhoods and with many houses, there are not that many rehabbed properties to compare to in a given neighborhood. Now, I suppose your strategy might work if you look at a city-wide basis. Here in Amarillo, properties are not being flipped in every neighborhood most (and I do mean most) of the time, so there are not rehabs to compare to. I might find three rehabilitated properties in a particular neighborhood in a year or more, but other neighborhoods would have none at all.

Days on market (DOM) is important when considering ARV; I agree with you on that. It is not useful when establishing FMV, though. The FMV is what it is. Now, a seller can choose to sell for less than that, but that doesn't change the FMV. For instance, I have a house for sell right now that has been discounted $7,000. It's still what it was worth before the discount, but the FMV has been discounted. Like with any other product or service, the house has been put on sale.