ARV * After Repair Value

I am sure like many other Realtors®, I have been contacted by new investors, who talk the talk "ARV". I don't know about other Realtors®, but it was not part of the lingo in my training. So, after some schooling on my own, it turns out the "ARV" equals the price the property will sell for at the end of rehabilitation.

So, I am continually asked what the "ARV" is. Well, the answer is very difficult to answer. How do I know what will be done with the property? What will the quality of workmanship will be? How long will it take to rehab the property? What will the market conditions will be at that future date? I can only go by two things: first, what are the current comps? And second, in what direction is the neighborhood going? And how much activity is there in that particular neighborhood?

I can talk about the value of the property in terms of the capitalization rate, because I can determine what rents actually are in a particular neighborhood. And I can, therefore, run real numbers to assign value to the property without consideration of comparables, etc..

I have been shown properties purchased along with the "comps" given to arrive at the "ARV" and have found that many times, the comps are not comps. I don't know if the people providing the comps just do not know the areas, or if they are pulling a fast one on an out of town investor. I would guess that both things are happening.

When you are in a city like mine, Philadelphia, values can change dramatically in a block or two. You have to know the neighborhoods to make a good and informed decision. You have to know the neighborhoods to run the comps. If you pick the wrong area by a block or two, value at the end of a rehab can have a very different meaning.

Now, the reason that this term has come to mind today was because an out of town investor wanting to buy a multifamily property in Philadelphia put me in touch with a hard money lender. The lender started speaking about the "ARV" and throwing numbers at me. What I realized was that this person actually knew the values and neighborhoods and was equipped to deal with the meaning of the term. However, much of the time, the "ARV" is presented as a fantasy. A property will be picked and a similar property, which has been rehabbed, in a much better neighborhood will be picked and the buyer/investor will say that the "ARV" is that of the house in the better neighborhood. Well, bad news boys and girls, it won't be. It won't be until the neighborhoods are comparable. Wanting it to be so won't make it so.

Philadelphia is particularly confusing on this basis for many people. You can have the exact same house in several neighborhoods and the price varies by hundreds of thousands of dollars. It all goes back to the basic rule of real estate: location, location, location. Therefore, you must know the neighborhood in order to determine what an "ARV" can even be, but you must also know what the end product will be.