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Colorado Commercial Loans As-Is Property Value vs. After-Repair Value (ARV)


November 29, 2017

Determining the actual value of a property can be a complex task, especially when investing solely for monetary purposes and profitability as opposed to business or personal reasons. Location, timeframe, and other outside factors can all have an impact on the value of a piece of land, residential, or commercial property.

By understanding the regulations revolving around a final financial determination, any investor can make a better informed decision about their potential action. One of the first steps is understanding how value is applied to the particular subject in question.

Defining the terms “As-Is Property Value,” “After-Repair Value (ARV),” and “Market Value” can be beneficial in understanding what does it all mean prior to investing as a buyer, seller or flipper - those looking to make a quick profit. While each represents a different figure, all are important for an overall price figure on any particular investment opportunity.

As-Is Property Value

One of the most direct values associated with a property is the As-Is Property Value. This determination essentially determines what the site would draw in a particular market with current conditions. The structure will remain in the viewable state and often can be figured to be far below potential worth based on other factors (detailed below).

Needed or necessary repairs will often be taken into consideration and can then be deducted from an as-is value associated with the piece of property. A straightforward alignment to the worth of a structure or land and based solely on the current condition.

After-Repair Value (ARV)

Opposite the as-is determination is the After-Repair Value (ARV) which ultimately takes into consideration the potential worth of a property following all updates and considerations necessary in order to bring a property up to or above similar area conditions. Taking into account other recently sold items in a location will help to associate an ARV to a specific property.

Instead of aligning a value with the structure or item in question based on the current condition (as-is property value) the ARV forecasts the potential future earning potential following repairs and updates. This can be extremely beneficial in determining if a project will be worth investment after considering both values and the discrepancy that exists between these two important values.

ARV also helps to establish the best financing options potentially available for the suitor by revealing an investment property options capacity. Lending sources take into account the different values and depending on the investor, assign a value based on some, each, or one of these various features.

Market Value

Finally, Market Value is the expected price a property will be sold for once available and placed on the open market. The ultimate finality in value considerations, market value envelopes all surrounding and similar type properties with recent transactions while also providing the more commonly associated value recognized by most individuals, even those not associated with real estate investments and common terminology.

Associated market value is used for investment opportunities, real estate, land acquisitions and other financial projects but also in more everyday functions. Any retail item or personally owned object listed for sale will immediately obtain a market value based on similar items and the demand for like pieces. The most common price an item can be expected to be sold for is a simple explanation for this final value option determination.

The most essential value in determining potential loan types and profitability of an item is the ARV as opposed to As-Is Value. When dealing with real estate and potentially flipping properties, the ARV can be extremely beneficial to a lender, investor, and/or loan applicant.

Understanding the correlation between as-is value and the possible gap to ARV will show a range of expected income potential. Taking into account all upgrades and modification costs, if a property can then be determined to draw a higher market value over any expenditures, the project can be suited as a plausible option for income considerations and quick profitability.

If not, suppose the ARV and anticipated draw from market value after acquiring the property on an as-is purchase does or will not cover the repairs, updates, remodeling and modifications - then the project is likely to not be funded and should not be based on the current projected value models. A non-starter by definition.

There are many other questions associated with each of the value types but ARV determinations can be the most complex. As with any value determination two key factors will greatly impact a property and should be given close analysis when making value assumptions and especially ARV projections.

LOCATION

Where a property or potential real estate investment opportunity is located is extremely important. While many homes, businesses or land for that matter can be upgraded, remodeled and outfitted with the latest and greatest of improvements, if the structure or land is located in an unmarketable location, the end result will not reach as high of profitability.

An run-down structure brought up to par with its’ surroundings, is a more manageable and potentially investable opportunity for consideration. Ultimately, location is key in real estate.

FOR SALE vs. SOLD

Another item for close examination in projecting value is to review sold properties within a reasonable timeframe. While items can be listed for sale at various costs, what matters is those which have sold indicating what people are willing to pay for like items.

Sold prices provide a good road map and general overview of a location’s earning potential.

Come see the experts at COHI Capital Private Equity Lending who can help you determine your needs and set up a beneficial plan immediately. Often lending on ARV, they will decide what type of loan will work best for you after finding successful funding needs for over a decade. . A full detailed review of your situation can be completed in addition to resolution issues and monetary considerations. Request some additional information by contacting COHI today. Call 970-922-3277 or contact us for a decision. Often these are made the same day and can be addressed depending on client needs and schedule.