After-repair value, and why yours might be wrong

Everything in a flip loan hangs off one number. Lenders size the facility against after-repair value, so if your ARV is optimistic, your financing is short — and you usually discover that after you have committed.

What ARV actually means

What the property sells for once the scheduled work is done. Not what it might fetch in a strong market, not what the listing across town is asking, and not what you need it to be for the numbers to work.

It is established by comparable sales: properties genuinely like yours, finished to a similar standard, sold nearby and recently. Each of those words does work.

What makes a comparable actually comparable

• Similar. Same broad type, size, bed and bath count, lot character. A three-bedroom ranch does not compare to a four-bedroom two-storey because both are houses.
• Finished to a similar standard. This is where most investor estimates fail — see below.
• Nearby. School catchment, subdivision and even which side of an arterial road all matter more in the Treasure Valley than people expect.
• Recent. Sold, not listed. Asking prices are aspirations; closed sales are evidence.

The optimism that does the damage

The commonest error is not fantasising about the market. It is comparing to a finish level you are not actually budgeting for.

An investor prices ARV against three recent sales that all had quartz counters, refinished hardwood and a fully reconfigured primary bath — and then budgets a renovation that includes none of those. The finished house is not that house. The ARV is a different house’s number.

Idaho specifics worth knowing

Treasure Valley neighbourhoods change character over remarkably short distances. Boise Bench blocks vary street by street. A Garden City property near the river prices differently from one three streets back. Caldwell and Nampa both have pockets where value shifts faster than a half-mile radius search would suggest.

An automated valuation drawing a circle on a map will miss all of that. So will an out-of-area lender relying on one. Local comparables selected by someone who knows the streets are worth considerably more than a wider radius of technically-similar sales.

The appraisal

The lender orders their own, usually a subject-to appraisal valuing the property as though the scheduled work is complete. That means the appraiser is working from your scope of work, so the scope needs to be specific and realistic.

A vague scope produces a conservative appraisal. A detailed one, with a clear schedule of finishes, gives the appraiser something to value.

If the appraisal comes in below your number, you have three options: reduce the purchase price, increase your own contribution, or walk. Arguing is rarely productive, though a factual error in comparable selection is occasionally worth raising with evidence.

Build in margin

A deal that works only at your ARV and only if nothing goes wrong is not a deal, it is a bet. Renovation overruns and market softening are both ordinary, and the margin you build is what absorbs them.

Experienced investors underwrite to a conservative ARV and are pleased when they beat it. Inexperienced ones underwrite to an optimistic one and discover the margin was the contingency they never had.