If you’re interested in investing in real estate, or just want to start a business flipping houses, then after repair value (ARV) is going to be one of the most important terms in your real estate vocabulary. It’s vital to understand not just what ARV is, but also how to calculate it because it can be a crucial step in determining how profitable a property will be. By determining the ARV, you can ensure that a potential flip has enough margin to make you money. It can also help you compare projects to decide which one will get you the most bang for your buck!
What is ARV?
ARV stands for after repair value. This is how much a property will be worth after any improvements, repairs, or renovations are completed. If you’re in the world of real estate investment or flipping houses, being able to determine the after repair value of a property can be a crucial clue as to whether or not it will be profitable enough to consider renovating in the first place.
Think of the ARV as the estimate of the property value after it has been completely renovated. Knowing the ARV can tell you several things:
- How much you can expect to sell the property for after repairs
- Which repairs you need to make to achieve that price
- How much you should be able to spend on repairs in order to maintain a profit
How to Calculate ARV
The ARV formula itself is straightforward and had two main components.
- The property’s current value, which is how much it is worth in its present condition. If you just bought the house, then this value is the price you paid.
- The cost of any renovations
Generally speaking, the first step in determining ARV is to look at comparable properties in the area and see how much they are worth or what they have recently sold for. You can do this by gaining access to the MLS (usually with the help of a realtor or brokerage) in order to get a detailed report of similar property values. Look at properties that have sold recently that are of a similar size, age, are in the same neighborhood, and have similar renovations to what you are hoping to achieve. This information will give you a baseline for determining what you can expect to sell the finished property for.
The next step is to estimate the current value of the property so that you know what you can expect to purchase it for in its present condition. You can do this by hiring a real estate appraiser or by finding listings of properties that have sold in a similar shape to the starting condition of the property you are looking at. Again, if you just bought the house, you can just use the sale price for this property.
The final step is to estimate the total cost of repairs and renovations. If you are an experienced investor, you might be able to come up with this number on your own. If not, it’s best to get estimates from reliable sources and contractors. Make sure to include the costs of materials, and it’s usually a good idea to get estimates from multiple different contractors. You should also factor in all the costs associated with selling and closing on the property when all is said and done.
The 70% Rule
When deciding whether or not a fixer-upper is going to be worth your money, the general rule of thumb is to abide by the 70% rule. This rule states that an investor shouldn’t pay more than 70% of the ARV.
To calculate the 70% rule, the formula is as follows:
Maximum purchase amount = (ARV x 70%) - estimated cost of repairs.
So, for example:
Let’s say you are interested in purchasing a house to flip and have determined that the ARV of the home is $400,000. After speaking with several contractors, you’ve concluded that the total cost of repairs will be $60,000.
To calculate how much you should spend on purchasing the property as-is, you would use the following formula:
Maximum purchase amount = $400,000 x 70% - $60,000
This comes out to $220,000. So this is the maximum amount you should consider buying the property for. But bear in mind that most times, an investor will try to purchase the property for less. This makes sense, since the cheaper you can buy it for in the first place, the more money you are likely to make.
After repair value is also important if you are looking to finance a property to flip. Some lenders will not lend more than 65% of the ARV on a property, so if financing is something you are looking into, calculating an accurate after repair value might be an essential step in you obtaining a loan.
Flipping houses and investing in real estate can be a fantastic way to earn some money. However, it isn’t without its trial and tribulations. By understanding how to accurately estimate the cost of repairs and renovations and calculate the ARV of a property, you can save yourself a lot of hardship down the road by ensuring a property has the potential to be profitable.
If you don’t feel comfortable doing the mathematics on your own, you can easily find an online ARV calculator to help you out. In general, though, the most critical aspect of calculating after repair value is making sure that you can plug in the most accurate numbers possible, as this will yield the best results. Make sure that you do your research on comparable properties, and get plenty of quotes from experienced contractors when estimating the cost of renovations.