ARV: After Repair Value in Commercial Real Estate
If you're an investor or developer interested in purchasing and rehabilitating distressed commercial property, after repair value, or ARV, is one metric you should know. The after repair value of a property is simply the property's market value after any repairs, renovations, or improvements have taken place.
Better Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get QuotesWhat is After Repair Value in Commercial Real Estate?
If you're an investor or developer interested in purchasing and rehabilitating a distressed commercial property, after repair value, or ARV, is one metric you should definitely know. The ARV of a property is simply the property's market value after any repairs, renovations, or improvements have taken place.
ARV= Property Purchase Price + Value of Renovations
If a property's ARV significantly exceeds the acquisition, repair, and holding costs, then the rehabilitation project might make sense. If it does not, then an investor may need to bid lower on the property or find a more suitable property to rehabilitate.
How ARV Works in Commercial Real Estate Financing
To better understand how ARV actually works in practice, let's look at an example. If an investor purchased an apartment building for $900,000, put another $200,000 into repairs, and had holding costs of $40,000, the combined cost of the property would be $1.14 million. To determine whether this is a good deal, an investor should keep the potential ARV in mind. In most cases, the combined cost of the property should be no more than 75% of the ARV.
This is because most lenders won't refinance a loan at more than 75% of a repaired property's ARV. And, since most investors use a combination of hard money and bridge loans to finance a rehabilitation project, they want to be sure that they can get refinancing for the full cost of the project once the rehab is over. So, if we take the numbers in the previous example, we can determine that the project's minimum ARV to qualify for $1.14 million in refinancing would be around $1.52 million.
$1.14 million/0.75= $1.52 million
So, as long as the ARV of the property reaches $1.52 million, the investor can use the money from their refinance to pay off their entire hard money loan, as well as any repair expenses and holding costs.
Questions? Fill out the form below to speak with a commercial real estate loan specialist.
Related Questions
What is ARV in commercial real estate?
ARV stands for After Repair Value and is the market value of a property after any repairs, renovations, or improvements have taken place. ARV is important for investors and developers interested in purchasing and rehabilitating a distressed commercial property, as it helps them determine whether the property is a good deal or not. Generally, the total cost of the property should be 75% or less of the ARV in order to qualify for a refinance. For example, if an apartment building is purchased for $800,000, another $200,000 is spent on repairs, and there are holding costs of $40,000, then the combined cost of the property would be $1.04 million. In this case, the minimum ARV to qualify for a $1.04 million refinance would be around $1.39 million.
How is ARV calculated in commercial real estate?
ARV is calculated by taking the total cost of the property (purchase price + repairs + holding costs) and dividing it by 0.75. For example, if an apartment building is purchased for $800,000, another $200,000 is spent on repairs, and there are holding costs of $40,000, then the combined cost of the property would be $1.04 million. To determine whether this is a good deal, an investor should keep the potential ARV in mind. In most cases, the combined cost of the property should be no more than 75% of the ARV. This means that the project's minimum ARV to qualify for $1.04 million in refinancing would be around $1.39 million.
ARV = (Total Cost of Property) / 0.75
Sources:
What factors affect ARV in commercial real estate?
The After Repair Value (ARV) of a commercial real estate property is affected by a variety of factors, including the location of the property, the condition of the property, the quality of the renovations, and the current market conditions. Location is a major factor in determining the ARV of a property, as properties in desirable areas tend to have higher ARVs than those in less desirable areas. The condition of the property is also important, as properties in need of repairs or renovations will have a lower ARV than those that are in good condition. The quality of the renovations is also important, as higher quality renovations will result in a higher ARV. Finally, the current market conditions will also affect the ARV of a property, as a strong market will result in higher ARVs than a weak market.
In summary, the ARV of a commercial real estate property is affected by the location of the property, the condition of the property, the quality of the renovations, and the current market conditions.
What are the benefits of understanding ARV in commercial real estate?
Understanding ARV in commercial real estate can help investors and developers make informed decisions when considering a distressed property. By understanding the ARV of a property, investors can determine whether the acquisition, repair, and holding costs are worth the potential return on investment. Additionally, understanding ARV can help investors determine the minimum ARV needed to qualify for a refinance loan, which can be used to pay off the entire hard money loan, and any repair expenses and holding costs due.
Sources:
What are the risks associated with ARV in commercial real estate?
The main risk associated with ARV in commercial real estate is that the ARV of the property may not be accurately estimated. If the ARV is overestimated, the investor may not be able to refinance the loan for the full cost of the project, and may be left with a loan balance that is higher than the value of the property. Additionally, if the ARV is underestimated, the investor may not be able to get the full amount of financing they need to complete the project.
It is important to note that the ARV of a property can be difficult to accurately estimate, as it is based on a variety of factors such as the condition of the property, the local market, and the current trends in the real estate market. As such, it is important for investors to do their due diligence and research the local market before making any decisions.