Does fixing the foundation raise the ARV?

Question

I always hear about how cosmetic upgrades and adding bedrooms/bathrooms raise the ARV, but I also hear that some items do not raise the ARV.

For homes that were purchased with poor components such as a distressed pillar and post foundation, galvanized steel piping, or knob and tube electricals, does replacing them with modern components raise the ARV for a higher cash-outrefinance down the line?

For example, completely redoing a single family house's foundation can cost from 10k-30k. Changing the piping and electricals can cost 10k. Will the appraiser consider these as value-adding renovations, and if not, why?

If this helps at all, for some context this is a property in Ontario.

Will Barnard · Answer

Assuming this is a flip since that is the thread topic you posted in, the upgraded foundation is a deferred maintenance item as would be a roof, etc. Fixing these items does not increase the value of the ARV, it merely brings the property to its expected condition to sell. New kitchens, baths, landscaping, etc. certainly add value as they are seen and touched by buyers and a home with a new kitchen and bathroom upgrades will sell for more than its model match on the same street that has old cabinetry.

In a flip, you certainly want to buy under market value so you can make a profit, if not, you defeat your purpose. Hopefully you calculated your offer price to a lower amount to account for the foundation costs.

Jeffrey Donis · Answer

I agree with @Mike Dymski it seems like this is a necessary repair that wouldn't increase ARV.

Bill Gulley · Answer

Well.....lol....as Will mentioned deferred maintenance isn't really adding value, but look at it as retaining value, however;

You actually did add to your new after repair value at least by the amount spent and most likely labor.

That's because; you said you bought it under market value.....actually, you probably paid market value at closing, you need to look at the definition of "Market Value" as used in real estate.

A close definition without looking it up;

When there are competent parties, having similar market knowledge, where the property is exposed to the market for a period of time to allow an understanding of the property being for sale and available to the public, where the parties acting in good faith reach an agreed price and consideration is fully paid.

That's close enough here.....so, if those conditions existed, you bought it at market value.  When a broken window is fixed, the cost should raise that beginning value, that should be true since your sale price should have included the cost of that maintenance repair.

When you buy a property, buying right, you need to assess the value, not just the cost but the economic value that must be added to put the property in good condition, a serviceable operating condition. That cost should be taken into account with your offer as a buyer and your agreed sale price. The assessment should be a fair value made in good faith, not added to just to beat up the seller for grins. That gives you a good indication of your acquisition cost to take care of deferred maintenance.

Now, you can estimate cost of other amenities, new stove, cabinets, etc. that add value; this is a cost plus profit analysis, my labor, talent, time and the cost of my lunch at work. You get the idea, when increasing the functionality, durability, life or ability to use the property we are adding economic values, this is where profits should be made.

Notice, I never said your offer had to be the seller's asking price or that acquisition costs were an asking price less actual repair cost, your arrival at your offer needs to consider all of these aspects in two areas, real costs to repair to an open market condition as well as the real and economic costs to improve the property with your profit.

All investors want to buy cheap, I get it, so do I, but I don't low ball a little old lady to see if I can get away with it. I actually look at what I bring to the table, my time, knowledge, experience and value that fairly (but it is probably more than newbie, no offense) gives me my needed return, that is where the offer comes from, justified, honest and up front.

So, most likely you did buy at market value but it may have been at a distressed value due to required deferred maintenance and repairs, but that isn't "under market value". Hopefully, the money spent will bring the value up from its distressed sale price, to a higher, more profitable value. Good Luck!

Deyu Wang · Answer

Thanks everyone for the answers! I didn't get an email and only recently realized I received some responses. Much appreciated.

I did buy the property quite a bit under market value I would say, so hopefully after the foundation repair the ARV can come up to at least market value!

Stephen Keighery · Answer

@David Wang ARV is meant to be the Fixed up value and when you buy it you should be reducing your price to compensate for the work needed and your targeted profit margin. If the house has a bad foundation you should buy it cheaper and then fixing it should restore the house to the market value of a fixed up house (ARV). So it's not that the foundation work increased the ARV it's that the work restored the ARV. Of course if you didn't buy right then fixing it won't make it worth more than market.

Mike Dymski · Answer

Not necessarily if those items are the norm in the area, but the purchase price should have been proportionally lower for the poor components.

Michael Plante · Answer

In my experience no

Just had an appraisal.  They did NOT take into consideration new roof vs comps roof are 15 years old or older

New appliances in subject property  VS who knows how old but from pictures they did not look new

New A/C in subject property vs 10 year old or older on comps

Why?  I don’t know   My guess would be how are they going to know the condition of other houses pipes etc

Your results may vary

Does fixing the foundation raise the ARV?

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