When an individual buys a home with the intent to flip it, it is important to know how much it will be worth after repairs are made. This is known as the after repair value (ARV), and it can determine how profitable a project may be. It may also determine how much a hard money lender may be willing to give someone attempting to flip a property.
Location Is the Most Important Factor
Much of a home’s value is based on where it is located. Homes that are located in trendy neighborhoods, in affluent suburbs or by schools are generally worth more than those outside of these areas. If a property is located close to an entertainment spot or relatively close to a major highway, it may also be worth more on the open market. However, it is important to note that a property may be worth less if it is located too close to the highway as there may be constant noise.
The Size of the Home May Influence Its ARV
In many cases, homes are priced per square foot. Therefore, a house that is 3,000 square feet is generally worth more than 2,000 square feet. Assuming a property will be appraised at $100 a square foot, a 3,000 square foot house would be worth $300,000 while the 2,000 square foot house would be worth $200,000. Before deciding to build the larger home, make sure that there is demand for that extra space as well as demand for homes at the resulting price point.
What Types of Features Will the Home Have?
The value of a home after it has been repaired depends on the types of features it will have. Properties that have decks, pools and hot tubs may be worth more than homes that don’t have such amenities. Finishing a basement or adding central air may also increase the value of a house assuming that surrounding properties don’t have these features.
However, it is important to note that those who live in colder climates may not necessarily care if they have central air or a pool. Those looking to rehab a home should research the potential return on investment of these features before adding them. This may be done through an online search or by talking to a local real estate agent.
How Strong Is the Housing Market?
When there is a strong demand for housing, the potential value of a given home may be higher. This is partially because there may be fewer available homes on the market. It may also be because investors may be willing to pay more for the opportunity to rent that property at a premium rate.
It should also be noted that houses that are repaired during times of strong demand generally don’t stay on the market long. If a property is not sold within 30 days, potential buyers may start to wonder if there is something wrong with it. This may result in the need to reduce the price or make other concessions to sell it.
Look at Recent Home Sales
In any housing transaction, sales from the previous six to 12 months can be a barometer for how much your home will be worth. Therefore, you may want to look at recent home sales involving properties that are roughly the same size as your home and will have similar features. It is also important to only compare sales of homes in either the same neighborhood or the same area of town where your property is located.
Use Your Best Judgment
In some cases, determining an ARV takes some subjective reasoning. For instance, you may think that a neighborhood is about to become the next trendy place for young people to live. However, a hard money lender may not agree with your assessment. In such a scenario, it may be a good idea to get an appraiser who does agree with your assessment to write a report solidifying your position.
It can be challenging to project the value of a home after repairs before any work has been done on the property. However, taking factors such as location, features and square footage into account can give you a good idea of what the property will eventually be worth.