AVR or after repair value is one of the important terms in the real estate business. If someone wants to understand the in-depth dynamics of the business, this is one of the sides they should be acknowledging.
What is ARV?
The after-repair value or shortly known as AVR is the total estimated net worth of the property after some major or minor repair job is done on it. The house or part of the house may be repaired, fixed up, or renovated; and calculating how much the house is valued now is part of AVR.
AVR is usually referenced by comparing the nearby properties. If both houses have similar size, shape, area, build, and style; the other house can be considered as the ideal price limit to consider the AVR rate. After repair value is most commonly used with rehabbers who fix and flip homes. But any real estate can input work on it and add value to it.
How to calculate AVR?
The most efficient way to decide on AVR is to look at comps in the multiple listing service (MLS) that have recently sold. Comps are a simple concept; they are comparable properties that are near-similar to the subject properties. Some of the criteria need to be met, for example, the condition of the property needs to be checked, the age of the property, square footage should ideally be within 250 square feet of the subject property to compare it easily, etc. Most investors compare at least 6 properties same to the subject property before making an assumption. To get a more precise ARV, determine the average per square foot price, then multiply that price by the number of square feet in the subject property.
Benefit if ARV
Understanding the concept of ARV is highly important as it determines the profit in the sale of the property. ARV gives you an idea of what it will cost to renovate the house. It determines how much of the house should be renovated to make it profitable. Knowing the worth of the home can help you to place the house on the market and see if it is a good deal or not. In addition, it helps to make the path easy for bigger investments in the house.
In other words, if the ARV is not high enough for a home, it is not beneficial to take any steps for costly renovation projects to increase the quality of the house. This is how the business is run. ARV also comes in handy for investing in a house before purchasing it. This will determine if the owner will be able to make a profit selling it after certain years.
There is a method called the 70% rule, which is something that gives a somewhat estimated idea about how to apply ARV to a property. An investor thinks the house would be worth $400,000 after renovation, they should not be spending over $280,000.