The after repair value (ARV) estimates the future value of a distressed property after it’s been repaired. ARV is not a property’s current value when purchased but rather the estimated value of the property once improvements are made. ARV is commonly used by fix and flip investors who purchase, renovate, and sell properties within 1 year.
A property’s after repair value includes both its purchase price and the value of its renovations. It’s used to estimate the future sale price of the property once renovated. It’s important for fix and flip investors to know the ARV of a property because it helps measure whether or not there is enough margin for the flip become profitable.
After Repair Value (ARV) Formula
There are several factors that can affect the calculation of ARV. However, the two main components of after repair value are the property’s purchase price and the value of repairs.
The after repair value (ARV) formula is:
ARV = (Property’s Purchase Price) + (Value of Renovations)
How to Calculate a Property’s ARV
To calculate a property’s ARV, the first step is to determine its current as-is value. The second step is to estimate the repair costs and value of renovations. The third step is to check your numbers and compare them to similar properties for sale or recently sold. This will help in determining the profitability of your fix and flip project.
The following steps will help determine the after repair value (ARV) of a property:
1. Estimate the Current Value of Property
To estimate the as-is value of a property, it is best to have it appraised by a professional appraiser. Another way to find out the value of a property is by looking at listing information found on Zillow. It is essential to gather as much information about the property because it will help you determine its current value.
The following information is important when determining a property’s current value:
- Location (neighborhood, accessibility, proximity to amenities, etc)
- Lot (size, corner or interior, shape, slope, terrain, roads available, etc)
- Structure (size, number of stories, type, style, etc)
2. Estimate Repair Costs & Value of Repairs
After figuring out the property’s current value, the next step is to estimate the repairs needed and the value of those repairs. ARV is the sum of the purchase price and the value of repairs. However, you’ll also need to estimate the cost of these repairs to determine your project’s profitability.
For example, let’s say the property’s purchase price is $100k, the repair cost is $25k, and you expect to sell it for $150,000, the value of repairs is $50k but the cost of repairs is only $25k. This results in an ARV of $150k and a potential profit of $25k.
As you can see, the value of repairs helps determine the property’s ARV while the cost of repairs help calculate the fix and flip project’s profitability.
3. Find Comparable Properties
This is the step where you should check your after repair value numbers by finding comparable properties within the same location. Find comps that you expect your property to look like after the repairs. Ensure that the ARV numbers you calculated are in the same range as the value of the comparable properties you find.
You want to find comps that are priced similarly to your expected ARV. If the value of the comparable properties is lower than your estimated ARV, it’s either a sign that the calculation is wrong or a warning that the project will not make a good investment. What’s more, if your estimated purchase price plus the cost of repairs is more than the comps, you’ll lose money.
Ideally, the following factors need to be considered when finding comparable properties:
- Must be within the same location
- Properties that are sold for the past 6 to 12 months
- Properties with almost the same size
- With the same number of bedrooms, bathrooms, etc.
Why ARV Is Important
ARV is important because it helps determine a project’s sale price, renovation budget, and profitability. ARV is most important to fix-and-flip investors because it’s common for them to buy, rehab, and sell properties for profit. It is also used by buy-and-hold investors looking to determine the value of a rental property after renovations to estimate rent and/or the future value of the long-term property.
ARV is also used by lenders to determine the maximum loan amount for fix and flip investors. These lenders are typically hard money lenders that require purchase and renovation information as well as personal investor info as part of their hard money loan application process
How to Use the After Repair Value
There are multiple ways to use ARV, but the best is the 70% of ARV rule. Fix-and-flip investors can use this rule to set a maximum bid on a property by considering its expected future value and the expected costs of its repairs. This ensures that investors will have enough margin to be profitable or enough of a cushion to absorb unseen costs.
The 70% of ARV Rule
The 70% of ARV rule is a rule-of-thumb that calculates the maximum bid prices on fix-and-flips. It caps bid prices at 70% of the expected sale price, minus repair costs. This ensures that investors are set to make a return around 30%. It also gives a buffer in case repair costs or other holding increase so that they don’t lose money.
The formula for the 70% of ARV rule is as follows:
Best Maximum Bid Price = (ARV x 70%) – Estimated Repair Costs
Let’s say, for example, that the ARV of a distressed property is $200,000 and it’s estimated that it needs $40,000 of repairs. To calculate the best maximum price to pay for that property, you can use the 70% of ARV rule, as follows:
Best Maximum Bid Price: ($200,000 x 0.70) – $40,000 = $100,000
As illustrated above, with the given expected ARV and renovation costs, the maximum bid price is $100,000. If you spend more than this on a fix and flip property you run the risk of losing money. For example, if holding costs are higher than you expect, you’ll want a cushion to ensure you remain profitable. Using the 70% ARV rule can help do this.
Pros & Cons of Using the After Repair Value Ratio
The property’s After Repair Value is an essential component of determining the profitability of a fix and flip project. Still, using ARV as a tool to determine the valuation of the property has its disadvantages. Below are the pros and cons of using ARV to determine a property’s sale price and return.
Pros of Using ARV
- It helps investors set maximum bid amounts and renovation budgets.
- ARV helps determine the selling price and potential profit margin of a fix and flip.
- It is the best way to determine how much a distressed property can be worth.
Cons of Using ARV
- The process of getting the most accurate ARV can be tedious and time-consuming.
- When not done properly, ARV valuation may be inaccurate.
- A professional appraiser will help you get the most accurate ARV but will increase costs.
The best way to determine a property’s future value is through its ARV. Proper data gathering and due diligence are both needed to calculate a property’s after repair value. Knowing a property’s ARV helps fix and flip investors to work backward and determine how much they are willing to offer for a property.