ARV stands for After Repair Value and is one of the most important things for real estate investors to know how to calculate.
Picture this: you’ve spotted a distressed property on your way to the gym, in an area that you love to flip in, but you catch yourself wondering… “is it actually worth the risk?”.
Knowing whether or not your investments in the area have the potential to pay off before you start contacting the owner can save you a ton of time, energy, and money if things go wrong.
That’s where ARV comes into the conversation.
ARV, or after repair value, is the estimated value a property will have after it’s repaired and listed on the market.
Flippers use ARV to help them gauge their potential ROI at a quick glance so they can determine whether or not it’s worth moving forward on. Likewise, wholesalers can use ARV to make sure they leave profit for their cash buyer and their own assignment fee.
The ARV formula is based on the value of the house after the repairs are made — not the home’s current condition.
It gives you a good starting point to determine how much profit is in a deal.
For the sake of this guide, remember that we’re talking about after repair value used in potential fips, not annual rental value which is used for buy-and-hold strategies.
There’s 3 main reasons investors calculate the after repair value on properties.
For investments like fix-and-flips, ARV is a quick way to determine how much a property might sell for after you’ve performed the repairs.
Working backward from that number, you can determine how much profit may be in the deal by estimating the expenses and cost of repairs.
To give you an example, let’s say you’re looking at a 3 bedroom, 2 bathroom home that’s selling for $200,000 and you require at least a $30,000 profit margin to make the deal worthwhile.
That means your cost to acquire the property and perform the repairs cannot exceed $170,000.
Knowing these numbers, the ARV, cost of repairs, and maximum offer you can make based on those repairs helps keep you from getting too emotionally involved in the deal.
You can quickly determine if the numbers make sense, or not, and if they don’t you can easily walk away. It can also help you quickly determine if an area you’re wanting to work in is worth it or if you should move onto other areas with higher profit margins.
Now that you have a general idea what ARV is and how it’s used, let’s start breaking down exactly how to calculate the ARV in your deals.
The first factor in calculating the ARV revolves around what other properties are selling for in the area you’re thinking about investing in.
You need to look at comparable properties.
Homes with the relatively same square footage, same number of bedrooms and bathrooms, built around the same time, with the same features, like a swimming pool or detached garage are comparable properties.
You can’t look at a 3 bedroom 2 bathroom home that was built 30 years before a new home that has 4 bedrooms, 3 bathrooms, a pool, and a detached garage, for instance.
Looking at what similar properties are selling for will tell you how much your property will be worth once it’s for sale and listed on the market.
Don’t know how to do this?
Check out the video below.
While running comps will help you figure out an accurate ARV, if you’re going to invest in the property you need to use that ARV so you can figure out the most you’re able to offer on the property -- and still turn a profit.
Remember, as a general rule of thumb you want to leave at least 30% in the deal. You can use the 70% Rule we mentioned to calculate what your potential profit will be while taking into account the 30% profit margin.
To get there, you need to understand the expenses you’re going to run into while you’re repairing the property and getting it ready to sell.
To help you understand the costs involved with renovating a property, check out this guide. It has a rundown of the most common expenses and repairs you might encounter and can be a good starting point for you.
And here’s a video to help…
We also recommend establishing strong relationships with contractors in your area.
Not only because they’ll be more likely to fast track your projects if you have a good relationship with them, but also because you can save a ton of money by developing the right relationships.
If the contractors you’re working with know you’ll send them regular business, they’re more inclined to offer discounts on the work they perform or let you in on some of the discounts they receive on material costs.
That means more profit in your pocket at the end of the deal.
You’re not doing full-on renovations on these properties. This is a mistake many new investors make, usually because they’ve been watching too many HGTV house flipping shows.
Your goal, when you’re investing in a fix-and-flip strategy is to fix -- not to completely overhaul the property and make it the shining star on the block.
That means going all-out and installing a new inground pool, quartz countertops, solar panels, and the most high-tech kitchen you can install just isn’t needed.
Instead, focus your money into making the property livable and desirable to buyers. That often takes far less money than people realize, especially new investors.
You can’t expect to make an accurate offer unless you’ve seen the property in-person.
No amount of pictures will tell you everything you know.
And, if the property is in distressed condition, many times there will be things hidden from the photos to make the property look more attractive than it really is in-person.
That means you need to take time to physically walk the property, taking pictures, making notes, and getting a good idea of the actual work involved.
The more information you can get at this stage, the better your negotiations will go and the more accurate your estimates & offer will be.
After you’ve gathered information on the property, gone back through the photos you’ve taken, and listed out everything the property is going to need, it’s time to make an estimate.
This will help you determine if the property falls inline with the 70% Rule and what you’re able to offer for the property while still standing to make a profit.
As you’re getting your bearings in the industry, there’s two quick ways you can get this done.
The first is by working with a more experienced real estate investor who has a good idea of the general costs associated with the repairs your property will need.
The second, like we mentioned above, is establishing relationships with contractors and getting them to walk the properties with you then having them put together an estimate afterwards.
Repair costs aren’t the only expenses you’ll encounter.
You also need to think about additional costs you’ll incur while buying, repairing, and selling the property. Expenses like:
These can quickly dwindle your profits, especially if you’re not taking them into account before you make an offer on the property.
ARV is great for helping you figure out how much money you can make on a deal, whether or not a property is worth making an offer on, and having a good place to start negotiations.
However, like everything else in real estate investing, it’s just a general guideline.
It absolutely is not the rule.
It does give you a good starting point but you still need to take into account things like the property’s condition, your repair costs, how much money you want to make, and the conditions of the market you’re working in.
Then, keep in mind that it’s only an estimate.
This is especially true if you’re brand new to investing.
If you’re new, you want to be as conservative as possible and enlist the help of a mentor or more experienced investor to help guide you during your first few deals.
Also, markets fluctuate. So an ARV that you calculated 6 months ago may not hold true today.
On top of all that, properties can hold unexpected surprises -- which can cost a lot of money.
That’s why we recommend using ARV as a general guideline to help keep you focused on the numbers instead of getting too emotionally involved in a transaction.
ARV is helpful for figuring out the final market value of a property, regardless of the work that needs to be done to fully renovate it and bring it up to that value.
Investors who focus on buying distressed and neglected properties can use ARV to determine the final value but will want to rely on the Golden Rule of Fix-And-Flips, the “70% Rule”.
The 70% Rule helps you determine the maximum that you can pay for a property while still leaving enough room in the deal for your expected profit.
To calculate it, use this formula:
Maximum Purchase Price = ARV x 70% - Repair Costs
As an example, if the property you’re looking at has an ARV of $200,000 and you estimate it needs $50,000 in repairs to bring it up to that value, based on the 70% Rule the most you will want to pay for the property is:
$200,000 ARV x 70% = $140,000 - $50,000 in repairs = $90,000.
That means the most you can pay for the property if you want to retain a 30% profit margin is $90,000. That would be your maximum offer.
This 30% margin leaves some room for unexpected expenses, errors in repair cost estimates, or an overestimated ARV due to nuances in the comparable properties you used to calculate it.
For this 70% Rule to work, you need to understand the repair costs involved and stay as conservative as possible when you’re laying out figures for the deal.
Accurately estimating repair costs can feel incredibly daunting, especially if you’re new to investing and need to make a cash offer on a property.
It doesn’t have to be, though.
An easy way to get familiar with what repairs are going to run is to make a list of the potential repairs you expect to make on properties in your area.
Then, you can group your repair costs together to give you a general, conservative idea of what’s involved.
For instance, if the property needs fresh paint, a bit of drywall work, and carpet repair, you can estimate around $15 per square foot to have the repairs performed by a contractor.
If the property needs carpet, paint, kitchen and bathroom repairs, or full renovations, expect to pay around $25 per square foot for a contractor to perform the work.
At the higher end of the spectrum, if you have to completely gut the property and start from scratch, you can expect around $35 per square foot for renovations.
Remember, though, that these are rough estimates.
They are not alternatives for learning what the actual repair costs are in your area.
Speaking with and building relationships with contractors in your market who can give you estimates on repairs, as well as spending time understanding real-world costs of repairs is highly advised.
This is one area that you can make serious, profit-killing mistakes if you’re not being conservative with the numbers you use when you calculate repairs using the 70% Rule.
If you’re new to real estate investing, it can feel like there’s a steep learning curve ahead of you.
However, with the right approach, mindset, and understanding the basics like calculating your ARV, repair costs, and expenses, you significantly reduce the risk you’re taking -- while significantly increasing your profit margins.
If you want to make sure your investing business is set up to generate consistent deal flow for you and that you’re making the right decisions from the beginning, check out our 5 day challenge where we’ll show you how the professionals audit & operate their businesses.