What is ARV or After Repair Value in Real Estate Investing?

One of the most undervalued (and often forgotten) aspects of real estate investing — that’s fundamental to any and all success — is “After Repair Value”, or ARV.

This formula is how you develop an unfair advantage in your business and quickly spot whether or not a deal is worth sinking any of your precious time, energy and hard-earned money into.

When you understand how to use the formula to your advantage, you’ll start spotting more opportunities that other investors are looking past because they don’t understand how to accurately calculate the ARV.

In this guide, we’re going to show you exactly what it is, help you understand how to use it (and why it’s such a powerful tool to have), how to calculate it, and then give you a few examples.

We’ll also touch on some of the biggest mistakes to avoid when you’re using the ARV formula to calculate the potential in a deal.

To kick things off…

ARV: What is After Repair Value?

ARV, or After Repair Value, at its simplest form, is the value of a home or property after renovations have been performed and it’s brought up to the value of comparable properties.

The formula gives you an idea of the potential in a property — or the estimated future value — based on the repairs you expect to perform.

You can determine the ARV by looking at comparable properties in similar size, age, condition, style, and build that have recently sold in the area.

It’s most commonly used by flippers or use the fix-and-flip model but can be used by any real estate investor who is planning to perform improvements or renovations that would increase a property’s value.

It’s also used by lenders who are offering renovation loans on distressed properties.

In general, a lender will look at the ARV on a property to determine whether or not the loan is viable by having an approved property appraiser assess the final value compared to the loan amount.

Why is ARV Important To Real Estate Investors?

ARV, or after-repair value, is an estimate on what the value of a home is expected to be after it’s repaired and listed on the market.

Many times, the properties you’re investing in are distressed or neglected. What makes a fix-and-flip (or other types of investments) so profitable is being able to perform those repairs while generating a profit for yourself.

You can use the ARV formula to purchase properties at discounted rates by factoring in the cost of any repairs or renovations it’s going to need to be brought back up to market value.

It’s also used to help you secure loans for flipping the property. For many lenders, the maximum they’ll lend on a renovation loan is 75% of the after repair value on the property.

How To Calculate ARV

The formula for getting the ARV on a property is relatively simple:

Take the property’s current value, add the total of the renovations needed, and you have the ARV.

Value + Renovations = ARV

With the formula, you can calculate what the property should be worth once those repairs are performed, assuming that you stay within budget, there are no major setbacks or emergencies, or issues uncovered while you’re performing the renovations.

To give you an example, let’s say the property you’re considering is valued at $150,000 and the renovation costs are valued at $30,000, the ARV would be $180,000.

Diving Into The ARV Formula

While this is a great way to get into the ballpark for what you can afford to pay for a property, there are a few things it doesn’t account for.

To ensure your estimates are as accurate as possible, there’s a few extra steps you’re going to need to take when your preliminary ARV checks out.

Step #1: Evaluate The Comps

The “comps” or comparable properties that are similar to the property you’re looking to renovate and flip are a great way to calculate a baseline ARV for the property you’re thinking about investing in.

Most commonly, you can find comps on the MLS, or multiple listing service.

However, if you’re not experienced calculating ARV and want to get help making sure you get it right, it might be worth establishing relationships with local real estate agents or other investors since they can typically access the MLS and have their finger on the pulse of the areas you’re working in.

In general, the comps you look at should be:

  • Similar in age.
  • Similar in condition.
  • Similar square footage.
  • Similar in neighborhood.
  • Recently sold.

By looking at the average sale price of properties that are comparable to the one you’re looking to invest in, you can more accurately calculate the ARV. This is especially true if those properties have had similar renovations performed before being listed for sale.

To get started, you want to build a pool of at least 3 to 5 compas in the area. This is going to help you be as efficient as possible while getting an average of the sales price.

For example, if you find 4 properties that are similar to the one you’re considering, and their average sale price was around $200,000, you can fairly accurately estimate that the future value of your property will be around the same level once you’re done renovating it, if it has similar upgrades.

Step #2: Get It Appraised

One of the best ways to make sure you’re properly calculating the ARV on a property is to have the home appraised by a professional appraiser.

They’ll help you determine what the current value of the home is while also understanding what the value of the property may be once the renovations have been performed.

By hiring an appraiser, they will examine every aspect of your property, including:

  • Location
  • Current Condition
  • Square Footage
  • Amenities
  • Bathrooms
  • Bedrooms
  • Curb Appeal

And more.

Once they’ve looked at every aspect of the property, they can give you an accurate estimate of the home’s current value. Then, you can take that value and start calculating the ARV based on real-world estimates, rather than guessing — especially if you’re inexperienced.

Since the appraiser will only be able to consider the renovations you’re wanting to perform when calculating the value, themselves, you’re also going to want to get it appraised again after you’ve finished performing them.

Home prices fluctuate and can go up or down WHILE you’re in the middle of renovating the property, meaning your original appraisal could improve — or even be negatively impacted — based on what the market is doing by the time you’re ready to list the property for sale.

That means it’s important to do a post-repair appraisal, as well, so you can develop an accurate selling price for the home and either maximize your profits or avoid lengthy delays in getting it sold.

Step #3: Assess The Repairs

While your appraiser is primarily looking at the home to help determine its market value, they can also help point out specific repairs that will be needed and even potentially help you figure out what those repairs might cost.

Couple this with the repairs that you already planned to perform and you’re able to get a more realistic estimate for what’s going to be required to bring the house back up to current market value.

It will also help keep you from running into unexpected expenses that you might run into after you’ve already calculated the ARV — which could quickly dwindle your profit margins.

Remember, though, it’s important to be as realistic as possible when you’re estimating the total cost of renovations and the value they’ll bring to the property.

ARV can be a tricky formula to calculate because there are so many factors that come into play.

If you account for all the repairs as well as take into account comparable properties, though, you should be able to get close to the actual ARV.

The 70% Rule in Real Estate

If you’re flipping or wholesaling properties, you can use the 70% rule to help figure out how much profit is inside a deal — both for yourself and the investors you’re flipping the contracts to.

To calculate it, use this formula:

After Repair Value x 0.7 – Repair Costs = Your Maximum Bid

So let’s say you’re an investor that found a property and you’re interested in flipping it.

You’ve estimated that the house is worth around $500,000 once the repairs and renovations have been performed and you expect those repairs to cost around $50,000.

That means you’ll be left with around $450,000 after you perform the repairs and sell the house — in an ideal situation with no emergency or major repairs that went unnoticed when you were looking at the property.

Using the 70% rule, you’ll know that you can’t spend more than 70% of the cost of the home minus the cost of repairs, which equates to $315,000. The maximum you can afford to spend and stay under the 70% rule is $315,000.

If you’re able to secure the property for that price (or better), it may be a good deal. However, if the asking price exceeds $315,000, especially if you aren’t 100% accurate with your repair estimates, it may be a good sign you should walk away from it and look for another property.

Remember, though, it’s a general rule of thumb. It is NOT a replacement for performing proper due diligence before you move forward with a property.

It is only a set of guidelines to help you quickly determine if a deal has enough profit margins in it so you can spend time digging deeper to make sure the formula checks out.

Aggressive investors will look at their maximum bid (70% rule) and then start as low as they think they can go while some more competitive investors who want to gain an edge may go upwards of 75% or 80%.

Keep in mind, though, that the higher you go on the scale (75% or 80% to be competitive), you significantly lower your margins and dramatically increase your risk. If one major thing goes wrong during renovations, you could be in the red.

Which brings us to other common risks and mistakes with using the ARV formula.

Common ARV Mistakes To Avoid

Being able to calculate ARV is one of the most helpful skills you can develop as a real estate investor.

Since it is just an estimate, though, there are a few risks and limitations associated with the formula.

If you’re going to use ARV in your business (and we recommend you do), make sure you also understand some of the risks associated with it so you can account for them, too.

Risk #1 – ARV is a time-based snapshot.

When you’re calculating the ARV, you’re actually only looking at the property’s value at one point in time.

Since material prices can fluctuate, you need to be aware that they could shift while you’re in the middle of a project. The costs can go up or down depending on what is happening with the supply chain, which saw massive price spikes over the last couple of years.

That could end up costing you even more money if you estimate material cost at one price and then it ends up costing significantly more once you get around to purchasing those materials.

Risk #2 – Values are ALWAYS fluctuating.

Housing markets also fluctuate on a regular basis.

That means the properties you compared yours to could go down, which also devalues the renovations you’ve performed on your property.

If markets face a downturn right as you’re getting ready to sell, you could be forced to take a lower price or hold onto the property longer than you initially planned to — with expenses adding up the longer you hold onto it.

Risk #3 – ARV is subjective.

When you’re having an appraiser look at the property, they’re looking for different things than you would look for as a flipper or investor.

This could actually cause the value of your home to be lower than what you initially accounted for.

That is true for appraisals after the property has been renovated, too. Your appraiser may not place the same value on those renovations that you placed on them before you started performing them.

There’s always a chance that you’ll put more money into the property that it ends up being worth once the work has been completed.

Final Thoughts

ARV is one of the best formulas you can use in your real estate investing business.

It’s how you quickly determine which properties are worth diving deeper into so you’re not pouring your precious time, energy, and hard-earned money into bad deals.

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