What is ARV? Your After Repair Value Formula
In the world of real estate it’s very common to take an “L” or “loss”, many successful investors know the feeling of buying a house, renovating it, and then selling it for little or no profit at all.
When you purchase a property in hopes to flip it, it's routine to carry out renovations before you sell it. However, after these repairs have been carried out, you are saddled with the responsibility of finding a suitable deal that will help cover the expenses and give you an excellent ROI. It is at this point that the After Repair Value (ARV) formula becomes necessary.
At face value, the After Repair Value (ARV) is a formula used by real estate investors to estimate the future value of a property being sold “as-is” after all repairs and renovations have been made. It is often adopted by investors who focus on recurring income and long-term returns that they can also benefit from the calculations after a repair has been done.
Unfortunately, most house owners may find it difficult to accurately determine After-Repair-Values, and as a result, fail to earn returns on their investment. I have prepared this guide to reveal how to correctly calculate the ARV, show you common mistakes to avoid in the process, and teach you how to maximize profits in your real estate investments.
The Meaning of ARV in Real Estate
The After-Repair-Value (ARV) is an estimate of what a house or property will be worth after renovations and repairs have been completed. It is a valuable tool to help real estate investors quickly determine a starting offer price for the home and determine if an investment property is worthwhile or not.
The primary objective when calculating the ARV is to get an accurate understanding of how much value the renovations will add to the property. And virtually all fix and flip investors make use of it since most of their work involves renovating old homes and selling them for profit.
After Repair Value is arguably one of the most crucial parts of a real estate investor's arsenal. Asides from determining profitability, the after repair value will define an investor’s exit plan and reveal which financing route is best.
How to Calculate ARV
The first step to understanding ARV is to learn its formula and applications. The formula for after repair value is quite easy; simply add your property's current price and the cost of renovations. I.e,
After Repair Value = Property’s Current Value + Value of Renovations
Usually, there are two main parts to the after repair value formula. The first one is the investment property’s current value. This is the value of the property in its current state and condition. It is usually the same as the property’s purchase price which is the price you pay to acquire the property.
The second part is the value of renovations. This is the value of your property after the renovations have been done. For instance, if an investor intends to purchase a house to flip, the calculations will be done by following certain steps in the formula application.
The first step is to estimate the subject property’s current value, which is also known as the “as-is value” in real estate. It is recommended that the investor has a professional appraiser for this job. Secondly, the investor needs to estimate the costs of the renovations, that is, how much money is to be spent on the repairs.
After you have gotten your ARV, you can begin the final step, which is Comparative Market Analysis (CMA). CMA is achieved by estimating your home's value based on recently sold, similar properties in the immediate area known as real estate comps.
Now that we have gotten to this point, I think it is time I discussed the "70% rule". A gem used by real estate investors and house-flippers to maximize their profits when applying the ARV formula.
What is the 70% rule?
The 70% Rule is a real estate investing rule of thumb that property flippers use to determine the maximum purchase price of a property based on the ARV. It effectively builds a 30% profit margin into the deal. This rule calculates the maximum bid price on the property by considering both its after repair value and the expected costs of its repairs.
Here is how the 70% rule works and the formula supporting it:
Maximum Purchase Target = (ARV x 70%) – Estimated Repair Costs
Therefore, the 70% rule states that real estate investors should not pay more than 70% of the After Repair Value (ARV) of the investment property, minus the expected costs of repairs. The importance of this is to ensure that investors and house-flippers make at least a 30% return on their investments.
Why does ARV Matter?
The After Repair Value (ARV) calculation process is vital in real estate investments. It helps realtors determine their long and short-term investment plans and assist them in identifying the precise steps to follow in achieving them.
Once you find out the property’s value, you can determine the expenses that will provide the best place to commence the renovation process. As a new investor, if you don’t know what the ARV real estate rule is for potential property, you are simply guessing. The ARV helps with accuracy. And as a real estate veteran, the ARV can help you easily assign value to a property based on that knowledge of the market within minutes.
Quick Summary
The main reason I discussed ARV today is to help those who have been experiencing problems with determining their property's precise value. The real estate industry is treacherous and most people often end up with a lot of unprofitable investments. When you apply all the principles stated in this article you will find yourself obtaining more value from your investments.
I don't want you to rely on guessing and end up running at a loss in your investment. Therefore, it is crucial to understand the processes and calculations involved before and after carrying out repairs on your property.
My goal is to help investors get started and make the best return on their money from every development project they embark on. Get more FREE content on how to invest in real estate by joining our community list.
