Investment Property Appraisal: Understanding AS-IS and AS-REPAIRED Values

When looking to invest in a property, particularly one that is run down and in need of renovation, there is always a need to define current and potential values. Investment property appraisal can be instrumental in defining AS-IS value and AS-REPAIRED value, which consequently enable investors to get an important insight into the future potential of the property. The present article describes the process of property appraisal for investment purposes and depicts how understanding AS-IS and AS-REPAIRED values can benefit your outcome in investment.

Understanding AS-REPAIRED Value

The AS-REPAIRED value is also referred to as the After Repair Value, ARV. It is what the property would sell for after all necessary repairs and renovations are achieved. This is the number which investors must calculate when they intend to flip the property or rent it out; it is indicative of the selling price or possible lease level when the property is restored to its best condition.

ARV normally acts to guide the investor’s decisions on the amount to invest in a property in order to make due repairs and renovations. This is where investors determine the amount they can reasonably spend on a property by subtracting the cost of repairs from the potential ARV. Normally, the ARVs for B and C-class properties are 5-10% lower compared to owner-occupied properties because these are normally lower-tier residential or multi-family units due to market positioning and tenant demands.

The Appraisers take the ARV based on the Sales Comparison Approach by doing some recent sales in the same locality of properties with similar characteristics. In a very active market, the appraiser will take note of the sold listings from the past 3 to 6 months, thus helping him arrive at an approximate realistic ARV with respect to the current market conditions.

Understanding AS-IS Value

The AS-IS value, by contrast, describes the current market value of the property in its present state. For properties requiring serious repairs or updates, this number is usually significantly lower than the ARV. Investment property appraisal in terms of the AS-IS value is necessary because it is its worth in an existing state without improvements, thus allowing the investor to compute a profit margin based on renovation costs.

Determining the AS-IS value also depends upon the Sales Comparison Approach, but it is more challenging for appraisers in locations that have fewer comparables or where subject properties may be in disrepair. Adjustments must be made for variations in condition, utility, and, more generally, marketability. A good example would be when a similar property sold recently but was in better condition; an appraiser would downward adjust the value to represent the work to be done on the subject property.

The Significance of AS-IS and ARV in Investment Decisions

For any investor who would want to invest, both the existing value that is the AS-IS and the after-renovation value or ARV is important to consider. These values enable investors to:

Calculate Profitability The difference between the ARV and the AS-IS value minus the cost of repairs gives you a rough estimate of your profit margin as an investor. This is most relevant in a fix-and-flip process where there is still so much that can be done to maximize returns on what is essentially a short-term investment.

Set a Realistic Offer Price: Knowing the AS-IS value helps investors make smart offers that include room for profit after making repairs. Overpaying for a property cuts into the gains that can be realized later, so accuracy in determining the AS-IS value is paramount.

Account for Changes in the Market: In a volatile or declining market, it’s now more important than ever to have an appropriate estimate of AS-IS and ARV. A high ARV of a scorching hot market is unsustainable in the downtrend; therefore, both the current and possible future conditions should be considered during the appraisal process.

How to Ensure Correctness in the Valuation of Appraisals for Investment Properties

Investors should hire experts capable of valuing real estate who would have extensive knowledge of the local market. Precise investment property valuation is not a matter of asking and, in fact, involves due care, everything from neighborhood trend to current information on local regulations and property taxes that could impact value.

Investors should, therefore, also examine emerging real estate trends and consult regularly with the experts, such as real estate brokers and financial advisors. This will help them stay ahead of the market shift and avoid making costly mistakes due to overestimating a property’s potential value or underestimating the cost of its repair.

Building Your Investment Team

Many investors are either too busy or do not have the expertise to maintain every aspect involved with a property transaction. It is very important that a network of professionals who can provide specialized insight be assembled. Your team will include:

A good real estate broker has extensive local market knowledge. They can help you identify properties that meet your investment criteria and assist in negotiations based upon current market conditions.

Financial experts and consultants will take on consultations that can enable you to structure your investments in such a way that you get high returns with minimum liabilities for taxes. They can also help you scrutinize the financial viability of different properties with their AS-IS and ARV values.

A certified and licensed real estate appraiser is the most important member of your investment team. They do detailed reports that form the basis of your investment strategy and provide an expert opinion of value on both the AS-IS and the ARV.

A real estate attorney ensures all your transactions are within the confines of the law. They help with contracts, zoning laws, and any dispute arising during the process.

Conclusion

Proper valuation is a key determinant of success in real estate investment. Expert investment property appraisals will help you understand AS-IS and AS-REPAIRED values, making sure that you make informed decisions to minimize risks and maximize returns.

The certified appraisers at Boston Appraisal Services are ready to assist with your investment projects. From beginning to end, Boston Appraisal Services will bring you comprehensive appraisals. Contact us today at 617-440-7700 or email us at orders@bostonappraisal.com.

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