What is the ARV in Real Estate and How to Calculate It for Investing
Having a vision is never enough if you are a real estate investor. You also need to have a good eye for potential. If you want to maximize this potential, you need to know the after repair value or ARV.
ARV means After Repair Value
When you buy a property, the value is what you paid for it. Then, after you spend money to fix up the property, the value of the property goes up. Now, the repaired value is the new value.
It is possible to use your insights into how much it will be worth even before you do any work on the property.
After all, it is the ARV real estate that typically determines if it is worth pursuing a deal or not. If the ARV justifies all future costs and the purchase price, the investor is a step closer to closing the deal.
But no one will calculate ARV real estate numbers for you. You need to learn how to do it on your own.
What is the After Repair Value in Real Estate (ARV)?
ARV real estate refers to the after repair value or an estimate of the value of the property after the completion of all upgrades and repairs.
These home renovations can include remodeling work, rehab, cosmetic work, or repairs.
It is an important number for real estate investors as this will calculate the margin between the desired investment property’s as-is value and the completely renovated and developed property’s value.
After you determine the value of a property, you can then start to identify the expenses that will give you the best place to get started.
If you are a new investor and you have no idea about the ARV real estate rule for a specific property, you will only end up guessing.
ARV real estate also determines the investor’s exist strategy and best route for real estate financing. An ARV essentially provides investors the best picture of what they could sell the property for.
To assess the ARV of the property, there is a need for gathering accurate estimates of the repair including the local market insight.
Professional investors who are knowledgeable in the industry of real estate investment can visit a property and have a value assigned according to what they know about the market in just a matter of minutes.
However, this is not possible for beginners.
What is the Meaning of the ARV?
Fix and flip real estate investors mostly use ARV for predicting the worth of a fixer upper property once it is ready to be sold. This can also help them measure whether or not it is possible to make a profit on that property.
Determining the ARV real estate is a critical step in all house flipping projects.
It not only tells you what you could expect to make once you sell your property after it is repaired, but it also gives you a good idea of its buying price and the amount you will be spending on the necessary renovations.
If you fail to calculate ARV, you run the risk of wasting lots of money and time on your fix and flip project.
What is the 70% Rule for ARV in Real Estate?
The 70% rule for ARV real estate is the rule of thumb for calculating the maximum bid prices on the fix and flips. This caps the prices of bid at 70% of the expected price of the sale minus the repair costs.
This guarantees the investors can make a return of about 30%. This also creates a buffer in the event the costs of repair or other holding also increase, so they don’t end up losing money.
The following is the formula for the 70% rule for ARV real estate:
Best Maximum Bid Price = (ARV x 70%) – Estimated Repair Costs
ARV Calculator and How to Calculate the After Repair Value
To calculate the ARV of a real estate property, the first step is to identify the existing as-is value. The next step is estimating the value of renovations and repair costs.
This helps determine the profitability of the fix and flip project.
Here are the steps on how to calculate the after repair value of a real estate property:
- Estimate the property’s current value.
When estimating the property’s as-is value, it would be best to hire the services of a professional appraiser.
Here are the important details you will need when determining the current value of a property:
- Lot (interior or corner, size, slope, available roads, terrain, shape, etc.)
- Location (neighborhood, proximity to amenities, accessibility, etc.)
- Structure (type, style, number of stories, size, etc.)
- Estimate value of repairs and repair costs.
After you determine the current value of the property, you need an estimate of the necessary repairs and their value.
ARV real estate is the sum of the value of repairs and the purchase price. But you also need to estimate the price of these repairs to check if your project is profitable or not.
The value of repairs will determine the ARV of the property because the repair costs help calculate the profitability of the fix and flip project.
- Look for comparable properties.
Make sure that the calculated ARV numbers are within similar range of value comparable properties you found.
You also need to look for comps with similar price as that of your expected after repair value.
If the comparable properties’ value is lower than the estimated ARV you have, this can be a sign of a wrong calculation or a warning that the project is not a good investment.
Also, you will lose money if the estimated purchase price together with the repair costs is higher than the comps.
It is ideal to consider the factors below when looking for comparable properties:
- Must be in the same area
- Must be almost similar size
- Should have been sold within the past 6-12 months
- Has same number of bathrooms, bedrooms, and other rooms
How Does the Rental ARV Help with Investing?
Calculating the possible profit is the number one way rental ARV real estate helps with investing.
For starters, you need this to estimate the cost of renovation, the value of the property following the renovation, and cost of rent to charge for investors working with long-term rentals.
However, there is one more important reason why this form of analysis is essential in investing and that is the role it plays in investment property financing.
Most fix and flip investors rely on external sources to find their property projects. Since these are short-term projects often finished within one year, their next resort is turning to hard money lenders.
But since there are high risks involved in fix and flip strategy, these money lenders require all possible details before they lend any money.
ARV real estate should be presented to the said lenders to get their approval.
One of the benefits of ARV real estate is that this offers you an opportunity to set an amount for the offer and have an initial estimate of the cost of renovation before it starts.
Thus, you need to allocate a budget for the whole project and maintain a profit margin at the same time from your investment in real estate.
Another advantage is that it helps identify the distressed property’s actual value. Note that the ARV real estate always means that you will work with a distressed home whatever the degree of the distress is.
You also want to know if its value is worth the work you will take on. Lastly, it is important to get your main goal: profit.
The ARV real estate helps fix and flip investors estimate the amount they will get from the deal.
How Do You Use the ARV in Real Estate Investing?
Many investors believe that is a good deal to buy foreclosures or a vacant home since they can make money because the seller is motivated.
There are many deals on vacant houses and foreclosures out there. Yet, you will only be able to tell if they are good deals once you know their ARV.
ARV real estate is among the most crucial factors to consider every time you invest in anything.
ARV real estate might not really seem important every time you buy rental properties, but it is. You need to look for a good deal on any property you buy.
There is a higher chance for banks to lend to investors if they get a good deal on the property.
Getting a good deal on rental properties can help in different ways:
- You earn more money every month since your loan has lower payments.
- You enter the deal with equity that instantly increases your net worth.
- You have lower debt to income ratio.
- It is easier to refinance the property in the future with more equity. You can get back all the investment you placed in the property with the use of BRRR strategy.
- Your financial position will be better if you will be selling the property.
It is easier to purchase retails at the full retail value; yet, among its biggest benefits in real estate is the ability to purchase below the market value.
It is important to know the ARV real estate when you flip houses. You earn money every time the property is sold, and you need to know how much you can sell off the property for after fixing it up.
The ARV determines what you will be paying for the property, the budget for the repairs, as well as the form of financing you will use.
If you work with hard money lenders, they can only lend you a specific percentage of the after repair value.
It is difficult to look for properties with sufficient room for flipping, and it could wipe out all your profits if you are off on the after repair value.
You also need to be familiar with the ARV real estate if you buy wholesale properties. Wholesalers usually get or buy a house under contract that they sell to a different investor with no repairs made.
To determine the price that the other investor will be paying for the property, it is important that you also know the ARV.
The after repair value is among the most crucial aspects to consider when wholesaling homes.
The after repair value is also equally important if you will be buying a house where you and your family will live.
Of course, you would want only the best deal on every home you purchase. You can make tons of money on your personal houses by getting excellent deals.
The best thing about striking a good deal on your personal home is that you could spend less money when you buy a house you will live in. This is also not to mention that the profit you will make is also usually tax-free.
The Bottom Line
The after repair value or ARV real estate of a potential deal has now become one of the most important tools for the investors today.
In the most basic form, the after repair value of a house will play a critical role in determining whether it is worth pursuing a deal or not.
For this reason, all investors should know how to properly calculate the ARV real estate if they hope to become successful.
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