Key Takeaways
- Three Distinct Property Valuation Methods: Market value represents what a property would sell for in an open market based on comparable sales, as-is value reflects the property’s worth in its current condition (accounting for needed repairs and deficiencies), and after-repair value (ARV) estimates market value after completing renovations and improvements.
- Strategic Application of Each Metric: Use market value as a baseline for evaluating potential deals and identifying target neighborhoods, calculate as-is value to determine maximum offers on distressed properties and financing needs, and estimate ARV to calculate profit margins by comparing it against as-is value and renovation costs.
- The 70% Rule Formula for Investment Decisions: Apply the formula “Maximum Purchase Price = (ARV × 0.70) – Repair Costs” as a starting point to ensure sufficient profit margins on fix-and-flip or rental properties, though this should be supplemented with deeper due diligence rather than serving as the sole underwriting criterion.
- Critical Mistakes to Avoid: Don’t confuse the three valuation types or use them interchangeably, avoid underestimating repair and holding costs by using conservative assumptions, prevent ARV inflation by using appropriate comps from the same neighborhood with similar property characteristics, and rely only on recent comps from within the last 90 days to accurately reflect current market conditions.
Before buying real estate, you must assess its worth. That’s the first step to ensuring you secure a return on your investment. However, there are different valuation metrics to choose from: market, as-is, and after-repair value (ARV) are each different and serve different purposes.
At ABL, we have 15+ years of experience evaluating 7,000+ real estate projects nationwide. As part of our due diligence, we carefully evaluate the before- and after-repair values of every property we finance. Explore our fast, flexible loan programs to get your next deal moving.
What Is Market Value?
Market value is the price a property would sell for in a competitive and open market, where both buyer and seller act prudently, knowledgeably, and in their own best interest. Think of it as the property’s value as determined by the marketplace itself.
Most investors determine a property’s market value by comparing the subject property to similar nearby properties that have recently been sold (aka “comps”). By averaging the comps’ sales prices and making adjustments for any property differences, you can estimate market value.
What Is As-Is Value?
As-is value is the value of a property in its current condition and use. For example, a distressed or vacant property may have a lower as-is value than an identical property that is already leased or in better condition. In other words, as-is value is a property’s value right now.
To estimate as-is value, take the property’s market value and make deductions for any needed repairs, deferred maintenance, vacancy costs, and other deficiencies.
Note: A property’s market value may or may not account for its current condition. However, the property’s as-is value always adjusts for its current condition.
What Is After-Repair Value (ARV)?
After-repair value—commonly referred to as ARV in real estate—is a property’s market value after any repairs, renovations, or improvements have taken place. It’s determined much like market value: by comparing the subject property—in its expected future condition—to similar properties nearby.
Many investors rely on ARV to determine if a property investment is worth the upfront cost. For example, you can follow the 70% rule, which says you should pay no more than 70% of a property’s ARV minus the cost of repairs to ensure you maintain a sufficient profit margin.
Key Differences
Now that you know the definition of each valuation metric, let’s go over key differences:
| Market Value | As-Is Value | After-Repair Value (ARV) | |
| Definition | Price a property would sell for in a competitive, open market | Value of a property in its current condition | Estimated market value after repairs and improvements |
| Assumed Condition | Good, marketable condition | Current condition (as it exists today) | Fully renovated/improved condition |
| How It’s Calculated | Comparable sales (comps) of similar nearby properties | Market value minus repair costs, deferred maintenance, and other deficiencies | Comparable sales of recently renovated properties in the area |
How to Use Each Metric as an Investor
As an investor, you can use all three valuation metrics to help you underwrite deals.
Using Market Value
Market value is a great baseline for evaluating potential deals. For example, you can use it to quickly qualify or rule out potential properties in your target market. You can also reference average market values when determining what neighborhoods to focus on in the first place.
Pro Tip: Talk to your local ABL loan officer for expert advice on property values in your market.
Using As-Is Value
Calculate as-is value to determine the worth of foreclosures, fixer-uppers, and other distressed properties. This can help you set a maximum offer and know how much you’ll need to borrow from a lender like ABL to finance the property.
Using After-Repair Value (ARV)
By estimating a property’s ARV, you can calculate the spread between it and the property’s as-is value to determine your potential profit margin. For example, if a property’s as-is value is $100,000 and the ARV after $50,000 in renovations is $200,000, you stand to profit $50,000.
To know how much you should offer for a distressed property, follow the 70% rule formula:
Maximum Purchase Price = (ARV × 0.70) – Repair Costs
You can apply this rule whether you’re planning to resell the property as a fix-and-flip or hold onto it as a long-term rental. With ABL, you can get financing for both strategies.
Common Mistakes to Avoid
To make the most of market, as-is, and after-repair value (ARV), avoid these common pitfalls:
Confusing Market, As-Is, and After-Repair Value (ARV)
First of all, don’t confuse the metrics. Know when to use each and how to calculate them. Avoid using the terms interchangeably.
Underestimating Repair, Holding, and Other Costs
Underestimating repair, holding, permitting, financing, and other costs can skew your return projections and may even lead to a loss. To avoid this, apply conservative cost assumptions.
Overestimating ARV
Don’t inflate ARV by being overly optimistic or using inappropriate comps (e.g., different neighborhoods, property sizes, or finish quality). Otherwise, you’ll be disappointed with your actual returns.
Relying on Outdated Comps
Aim for the most recent comps possible. Ideally, this means properties sold within the last 90 days. Anything older may be too outdated to accurately reflect current market values.
Stopping at the 70% Rule
While the 70% rule is a good rule of thumb, it shouldn’t be your sole underwriting criterion. Instead, use it as a starting point before diving deeper into the deal’s details.
Pre-Qualify for an ABL Loan to Finance Your Next Investment Property
Once you’ve found a promising real estate deal, explore your financing options. Getting pre-qualified for a loan helps you budget and shows sellers you’re serious about buying.
Whether you want to inject new life into a fixer-upper or buy and hold a rental, ABL has you covered. Our hard money loan programs are designed to be fast, flexible, and easy. Plus, if you’re unsure about a deal, our experienced underwriting team can help you see if it will pencil.
Pre-qualify for an ABL loan today!