Current Property Value vs After Repair Value (ARV)
Updated: Aug 23, 2019
What is Real Estate ARV?
When looking at comparable sales, it's important to understand the difference between a property's current value and it's after repair value, also known as ARV. A property's current value is how much a buyer is willing to pay for it in its current condition.
Therefore, we can't base a property's value on that of a neighboring property's sold price unless the two are in comparable condition.
For instance, if a neighboring sold property was recently remodeled with new paint, carpet, flooring and counter tops, etc., but your house hasn't been updated in 20 years, those two properties really aren't very comparable because a buyer would pay far more for the upgraded property than the outdated one.
In this case, you would either want to upgrade your house before selling, so you can increase its value to that of your neighbor's house and sell for a higher price. Or you would need to use sold comps of houses that also have not been updated recently.
In order to see the condition of a comp, just look at the photos linked to it's MLS listing. If there aren't enough photos, search the property address online and you may be surprised at what you find. Quite often you can find more photos of a property from other previous listings.
The term ARV is often used in the world of real estate investing but can also be applied to typical buyers and sellers. How you use an ARV depends on what you are trying to achieve.
It's important to know the Current Value vs the ARV for 2 specific reasons. When you are buying, you want to buy for the lowest price. But when you are selling, you want to sell for the highest price.
Let's first take the case of a buyer. If a seller had not upgraded their property but was basing their asking price on houses in the neighborhood that are upgraded, you would now have a stronger position for negotiating a lower price with the seller, using the photos and sold prices of the unimproved properties to support your lower offer.
In this particular case, your goal as the buyer would be to buy at a lower price because of the outdated condition of the house. You could then fix it up at your leisure once you move in, or you could fix it up quickly to increase its value and equity for a higher selling price if you plan to resell it as an investment property.
In the case of a seller, if your house hadn't been upgraded to the highest ARV's in the neighborhood, your goal might be to fix it up to increase its value for a higher sale price and a bigger profit.
Having recent and accurate neighborhood comps from a knowledgeable and experienced local real estate agent is the only way to be sure of your true house value.
Using a great agent for comps will not only get you the best comps in your neighborhood, but will also give you help with analyzing those comps and their differences for the most accurate house value possible.