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How Do I Determine After Repair Value of a Property?

Answers to Five Common Questions About Determining Value

One of the most critical things you need to know when buying an investment property in need of rehab is what the property will be worth when the rehab is finished.  This is called the After Repair Value (“ARV” of sometimes “ARP”). The ARV is different than the “as is” value, as it reflects the value of the property after ithas been rehabbed, not in its current condition. At RFG and many other lenders, loan amounts are based on, among other things, the After Repair Value, so having a sense of it is extremely important when applying for a loan and insuring the profitability of your project. There are many ways to determine the ARV, below are questions about five suggested methods.

1. What are the important characteristics of a property to consider in determining ARV?

Websites such as zillow.com will frequently provide you with details of sold properties, such as number of bedrooms, bathrooms and square footage. Compare the house you are looking at to other houses in the same zip code with similar characteristics to get a sense of value. You may need to make some subjective adjustments for quality or appearance differences. Make sure to look at sold properties, not properties listed for sale, as the listing price is not always reflective of the true value of a property.

2. Would looking at the size of similar sold properties as close as possible to the property I am interested in help me?

Using websites such as zillow.com or realtor.com, find three similar sold properties as close as possible to your property. Determine the average price of the three properties and the average square foot of each property. Then divide the average price by the average square footage to determine the average selling price per square foot. Next, multiply this price per square foot by the square footage of your property, to determine its value based on the square footage of the property.

3. Can a realtor provide me with a Comparative Market Analysis?

Ask a realtor involved in the transaction, to provide you with a Comparative Market Analysis (“CMA”). The CMA will provide you with closed sales in the area along with the characteristics and picture of each property, but will not necessarily give an expected value for the property you are interested in. From the CMA, however, you can determine the expected After Repair Value based on one of the methods found above. A broker involved in the transaction will not usually charge a fee for the Comparative Market Analysis.

4. Can a local realtor provide a Broker’s Price Opinion?

Ask a realtor not involved in the transaction to provide you with a Broker’s Price Opinion (“BPO”). The BPO will give you information similar to the CMA, but will also give you a conclusion as to value. Make sure to let the broker know how you plan to rehab the property and that the broker understands that you need both an “as is” value and the ARP. You will generally have to pay the broker a nominal fee to prepare the Brokers Price Opinion for you.

5. Should I employ an appraiser to appraise the property for me?

You can hire an appraiser familiar with the area to prepare a full appraisal for you. You should request both an “as is” and “as repaired” value. The appraiser will prepare an appraisal report based upon the square footage of the property and local sales. This method of determining value is considerably more expensive than the others, but may be the most thorough. Be advised, however, that most lenders will require an appraisal from an appraiser of the lenders choosing, so you may end up paying for two appraisals on the same property.

Please feel free to contact us regarding your purchase of a residential investment property in need of rehab. RFG now lends in nine states – Pennsylvania, New Jersey, New York, Connecticut, Delaware, Maryland, Virginia, North Carolina and South Carolina. We are looking forward to your call at 877-643-9066.

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