A property’s after repair value (ARV) is a home’s estimated value after repairs, upgrades, and renovations have been completed. It is typically used by fix-and-flip and fix-and-hold investors to determine if a particular project will be profitable. A lender may also evaluate ARV as part of its qualification requirements.
If you’re looking to get financing for an investment property, we recommend considering a company like RCN Capital. It has several programs, including fix-and-flip loans, that offer financing for up to 90% of the purchase price, 100% of the renovation costs, and 75% of the ARV.
ARV Formula & Example
In addition to using our calculator above, you can manually determine a property’s ARV by using the following formula:
Example of How to Calculate ARV
Using the ARV formula, the following example shows how ARV would be calculated:
Property Sales Price | $60,000 |
Projected Increase in Value From Repairs, Upgrades & Renovations | $80,000 |
ARV | $60,000 + $80,000 = $140,000 |
Note that ARV does not consider the cost of repairs, upgrades, or renovations. Instead, it only considers the projected increase in the property’s value once those upgrades and repairs have been completed.
That said, the cost of repairs will be an important figure for investors to be aware of, as it can affect a project’s profitability. We will discuss this in the next section.
The 70% ARV Rule: Formula & Example
The 70% ARV rule helps investors determine the maximum bid or purchase price that should be made on a property to ensure a sufficiently high return. Unlike the ARV calculation, the 70% rule also takes into account the cost of repairs rather than just the projected increase in value after they’ve been completed.
The 70% rule can be determined by using the following formula:
Example of How the 70% ARV Rule Works
Using the same scenario as before, here is an example of how you can use the 70% ARV rule to determine your estimated profits on a fix-and-flip property:
Property Sales Price | $60,000 |
Projected Increase in Value From Repairs, Upgrades & Renovations | $80,000 |
ARV | $60,000 + $80,000 = $140,000 |
Estimated Cost of Repairs | $38,000 |
Maximum Bid Price | ($140,000 × 70%) − $38,000 = $60,000 |
Potential Profit [ARV − (Purchase Price + Estimated Cost of Repairs)] | $140,000 − ($60,000 + $38,000) = $42,000 |
Property Value Considerations for ARV
A major component of ARV is accurately estimating the property’s value before acquiring it, its value after renovations are completed, and the cost of repairs. Here’s how you can complete each step:
Step 1: Find comparable properties to determine the home’s initial and post-renovation value
The value of a property will fluctuate over time based on current market conditions. Put simply, it will be what an individual would be willing to pay for it. An appraisal can be performed to estimate the current market value and the value a buyer would be willing to pay after any repairs and renovations have been completed.
The appraisal process involves analyzing the details of the property and comparing them to those of similar properties that have recently sold. Common property characteristics analyzed include the items below:
- Gross living area and room count
- Location
- Age of property and quality of construction
- Special features, such as solar panels or pools
- Subject property views
- Proximity to amenities, such as entertainment, shopping, and employment centers
- Estimated cost of repairs needing to be made
Step 2: Estimate the cost of repairs, upgrades, and renovations
The cost of repairs, upgrades, and renovations can vary greatly depending on the contractor you decide to hire. It’s recommended to get multiple quotes, paying special attention to things like the estimated timeframe for completion, the type and quality of materials to be used, and the reputation of the firm being hired to conduct the repairs.
Benefits of Understanding ARV
Calculating the ARV can help both buyers and sellers of investment property. Here are some benefits of ARV:
- Determines future profit: By calculating the potential ARV and comparing it to the sales price, investors can determine whether a potential property will earn enough profit after a fix-and-flip.
- Sets the proper sales price: Once an ARV is calculated, sellers can set the right sales price for a distressed property to attract investors to buy it.
- Forces cost-benefit analysis: By completing the ARV process, investors are forced to make thorough estimates of repair costs and potential value increases, which helps reduce the chance of making a bad investment decision.
- Allows investors to set budgets: By estimating the cost of repairs and the potential increase in value, investors can set budgets for construction teams to avoid overspends, which could cut into profit.
- Allows for an easier loan approval process: Many lenders have limits on a property’s ARV. Knowing beforehand what this is and how it compares with the property you’re looking to acquire can help you easily identify lenders you’ll be eligible for. If you are having trouble getting qualified for a loan, review our guide on how to get a small business loan for tips and recommendations on improving the strength of your loan.
Limitations of ARV
While the ARV is one tool fix-and-flip investors use, it is far from perfect. There are several drawbacks to using ARV.
- It is impossible to predict the exact value of repairs: While market data can help you get a good estimate on the value of repairs, it is hard to know exactly how much the repair will affect the ARV. This could result in a lower sales price after repairs, reducing your profit.
- It takes time and money to get an accurate ARV: Calculating all of the repair costs, added value, and comparable property values takes a significant amount of time to make sure you get it right. And it often takes the help of an expert, such as a real estate agent or certified appraiser. Using an expert will make the estimates more accurate but will cost you more money.
- It does not consider market fluctuations: The market has been very volatile over the past few years. While the commercial real estate market isn’t as volatile as the consumer real estate market, it can still fluctuate during the repair process, making the property’s final value different than estimated.
- Values are subjective: In the end, whether it is repair costs, repair value added, or comparable property values, they are subjective values. You can make the best guess you can with excellent data and professional assistance from a real estate agent or a certified appraiser, but in the end, it’s not perfect. Therefore, fix-and-flip investors must be prepared for the risk involved with a potentially poor estimate.
- Having a good ARV does not guarantee loan approval: ARV is just one of many factors a lender will review when evaluating your eligibility for a loan. Check out our guide on other common small business loan requirements to see what else a lender can look at.
Frequently Asked Questions (FAQs)
A good ARV is generally considered to be 70% or less. This figure is meant to allow an investor to place a competitive bid for a property while also allowing for a sufficient amount budgeted for repairs to ensure a profitable fix-and-flip project.
A property’s value can be determined by having an appraisal inspection completed. Appraisals involve analyzing the property’s characteristics and comparing them to those of similar properties that have recently sold.
ARV can be increased by conducting additional upgrades that add value to the property. Upgrades should be based on what a reasonable buyer would be willing to pay. However, investors should pay attention to these added costs in relation to the added value they’ll bring.
Bottom Line
ARV is an important figure to understand, especially if you’re a fix-and-flip investor. It can provide insight into the profitability of a project and give you guidance on how much you should pay for the initial acquisition and subsequent repairs. That said, ARV does have its limitations, so it should be just one of several tools you use in your decision-making process.
