Updated: Jan 12, 2022
Having a vision is never enough if you are a real estate investor. You also need to have a good eye for potential. If you want to maximize this potential, you need to know the after repair value or ARV but no one will calculate ARV real estate numbers for you. You need to learn how to do it on your own.
Understanding After Repair Value (ARV) In Real Estate
For real estate investors who make money by flipping homes, ARV is a critical metric for determining whether a property can be profitable. Short for after repair value, ARV tells you how much the home is worth after you’ve made the necessary repairs and renovations.
These home renovations can include remodeling work, rehab, cosmetic work, or repairs.
How to calculate ARV?
On a basic level, the ARV of a property is its purchase price plus the value of the renovations you’d need to make to make it sale-ready. To calculate the ARV of a specific property, here are the steps to take.
The ARV Formula is:
ARV = Property’s Current Value + Value of Renovations.
1. Determine the value of the property
The seller will likely already have a sales price listed for the property. But just like any homebuyer, you’ll want to hire an appraiser to give you an estimate as a disinterested third party.
The appraiser will consider several factors to determine the property’s market value including:
Age and design
Heat and air systems
Storage and garage space
Condition of the property, including renovations
Number of bedrooms and bathrooms
Comparable properties in the area
2. Estimate the value of renovations
Remember that the ARV of a property is its sales price plus the value of the renovations, not the cost. To estimate the value of the renovations you’ll make, take a look at comparable properties in the area that you expect the home to look like when you’ve finished the work. Focus on properties that are in the same neighborhood or close by, are similar in size and features, and have sold in the last 30–60 days since the housing market can fluctuate wildly in a short period of time, so something that’s sold 6 months ago probably is not relevant as a comparison property.
Tip: If you hired an appraiser to estimate the value of the home, you can ask them to share information about comparables with you. Otherwise, you may need to do some legwork of your own to gather the information.
How to Determine ARV?
When borrowing money from hard money lenders, they will look at the property to determine its after-repair value or ARV. So, be sure you’ve already evaluated the property’s ARV yourself, otherwise, you could be about to sink your money into a losing deal.
Research the following:
The property, including the location, lot, building, comps
The estimated value of repaired properties in the neighborhood in the last 30–60 days
What is a Good ARV?
When it comes to investing in real estate in Texas, the rule of thumb is that you want to make at least a 30% return on investment (ROI) for a property. That means you should avoid bidding on or purchasing real estate that exceeds 70% of the ARV minus the projected cost for repairs and renovations. To calculate that number, use the 70% rule.
What is the 70% rule?
The 70 percent rule states that an investor should pay 70 percent of the ARV of a property minus the repairs needed. This guarantees the investors can make a return of about 30%. This also creates a buffer in the event the costs of repair or other holdings also increase, so they don’t end up losing money.
How do you calculate 70% ARV in real estate?
Using the 70% rule is simple. You multiply the property’s ARV by 0.7 to determine the maximum price you would pay for that property.
The 70% rule formula for ARV is:
Best Maximum Bid Price = (ARV x 0.7) – Estimated Repair Costs
For example, if you estimate that a property’s ARV will be $300,000, this means that you should spend no more than $210,000. Remember, you also have to take repair costs into account.
Calculate your profit
Renovation costs are not included in the ARV calculation but they are important for determining your profit. You may be able to estimate these costs on your own if you are an experienced fix-and-flip investor. Otherwise, get some estimates from multiple contractors.
It is also important to note that renovation costs are not the only expenses associated with fixing and flipping a property. You’ll also want to consider the following:
Closing costs on the loan you’ll use to buy the property
Interest, insurance, and taxes associated with owning the home
Cost of marketing and selling the property once it’s ready to be flipped
Once you know how much the renovations will cost, subtract that figure from the ARV and you’ll get your profit.
Importance of calculating your ARV
For real estate investors—especially fix-and-flip investors—who are trying to determine how much they can eventually sell a property for -
The ARV gives them an idea of whether or not their project will be profitable and it also provides them with the information they need in order to make decisions on which exit strategy to use and what financing course of action to take.
For borrowing money - It helps lenders determine the maximum loan amount they want to issue for real estate renovation projects. Some hard money lenders will loan 65-80% of the property’s ARV. However, the exact amount will depend on multiple factors, such as the type of property, its condition, and the experience level of the investor.
For any real estate investor, determining the ARV is extremely important. You have to remember that every house is different. If you are only relying on others to give you values, you could be making a huge mistake! A 10% difference in values could mean the difference between making and losing money.