What is Property’s After Repair Value (ARV)- How to Calculate It

Real estate investing can be a complex and confusing field, but understanding certain key concepts is essential for success. One of these key concepts is ARV or after-repair value. The After Repair Value or ARV Real Estate, as the name suggests, is the future value of the property after it’s been repaired. Keep in mind that it’s not a property’s existing value when purchased but rather the estimated value of the property once remodeling is done.

ARV is common among fix and flip investors who buy, renovate, and sell properties within a certain time frame. The after repair value of any property includes both its original price and the price of its improvements. It is used to gauge the future price of the property once remodeled.

As a fix and flip investor, you should know the ARV as it helps determine if there is enough margin on flipping a house.

In this blog post, we’ll explore what ARV is, how it’s calculated, and why it’s so important in real estate investing. We’ll also discuss how to determine the ARV of a property and how it can be used to make more informed investment decisions.

Whether you’re a seasoned real estate investor or just starting out, understanding ARV Real Estate is crucial for maximizing your profits and minimizing your risks. So, let’s dive in and learn more about this essential concept.

What is ARV?

ARV, or After Repair Value, is a term used in real estate investing to describe the estimated market value of a property after any necessary repairs or renovations have been made. It is a crucial concept in real estate investing because it helps investors determine the potential profitability of a property.

How is ARV Calculated?

The process of determining the ARV of a property involves analyzing the current condition of the property. Identifying any repairs or renovations that need to be made, and estimating the cost of those repairs.

Once the repairs are completed, the market value of the property is determined and compared to the purchase price and renovation costs to calculate the potential profit.

It’s important to note that the ARV is an estimate, and it’s not a guaranteed value. The actual value of a property may fluctuate based on market conditions and other factors.

However, a well-researched and accurate ARV estimate can provide a valuable benchmark for investors to use when assessing the potential profitability of a property.

Understanding the ARV Formula

ARV can be affected by many factors. However, the two main elements of ARV of any property are the purchase price and the value of renovations. Thus, we get the formula given below:

ARV = (Property’s Purchase Price) + (Value of Renovations)

But calculating these variables can be a little challenging. While the purchase price for the current value is always taken, buying right at a deep discount is needed. You need to make sure that you will end up with a sound profit. You can make profits during the fixing stage. However, risks can’t be overlooked. For example, a property requiring cosmetic touch-ups on the surface might require an extensive rehab job.

Why is ARV Important in Real Estate Investing?

There are several reasons why ARV is important in real estate investing:

1. Determining Profitability

ARV is a key factor in determining the potential profitability of a property. By comparing the ARV to the purchase price and renovation costs, investors can estimate their potential return on investment (ROI).

If the ARV is significantly higher than the purchase price and renovation costs, it may indicate that the property has good potential for profitability.

2. Determining a Fair Purchase Price

ARV is also used in determining a fair purchase price for a property. Investors can use the ARV as a benchmark to determine whether the asking price of a property is reasonable.

If the asking price is lower than the ARV, it may indicate that the property is undervalued and has good potential for appreciation.

3. Potential for Appreciation

ARV can also be used as an indicator of a property’s potential for appreciation. Properties with higher ARVs tend to have more room for appreciation and, therefore, may be more attractive investments.

4. Potential for Rental Income

ARV is also used to determine the potential rental income of a property. By comparing the ARV to the cost of renting similar properties in the area. Investors can estimate the potential rental income they could receive from a property.

5. Tax benefit

In some cases, the ARV can be used to determine the tax benefits associated with a property. For example, if the property is purchased for less than the ARV and is then sold for more, the profit may be subject to capital gains tax.

Overall, ARV is an important concept in real estate investing as it can help investors make more informed decisions about the potential profitability and potential risks of a property.

It is a key indicator of a property’s value, and it is crucial to understand it in order to make smart investment decisions.

How to Determine the ARV of a Property?

To calculate the ARV of real estate, a property appraiser will check the property to figure out its existing value, and then the value after it is remodeled, based on the suggested repairs. The appraiser will consider the suggested repairs such as adding square footage, adding a kitchen, or if walls will be renovated or remodeled the entire home.

They will then find other houses in the neighborhood that are comparable to the property after the planned repairs and improvements are made. The property’s ARV will be then determined based on those similar properties.

70% RULE Also Comes into Play

The 70% thumb rule states that an investor should spend no more than 70% of the ARV of a property minus estimated repair costs. In other words, they should make the deal so that they can make a 30% ROI on that flipped project.

So the ARV formula will go like this

(ARV x 0.70) – Estimated Repairs = Maximum Purchase Target

For example, the ARV of a property is $300,000 while the estimated cost of repairs is $ 50,000.

To find out the best maximum price for that property, use the 70% of ARV rule, as follows

($300,000 x 0.70) – $30,000 = $180,000

As stated above, with the given expected ARV and remodeling expenses, the ideal bid price would be $180,000. If you spend more than this amount, you might end up with a loss. If holding costs goes higher than you expect, you’ll want a buffer to have profits. That’s why the thumb rule of 70% ARV is important.

Advantages and Disadvantages of After Repair Value

While the ARV of a distressed property helps you determine the profitability of a project, it has its share of demerits. Here are some advantages and disadvantages of using ARV to figure out a property’s sale and return.

Benefits of Using ARVs:

• You can set maximum bid amounts and remodeling budgets.
• You can figure out the right selling price and potential margin of a fix and flip.
• You can determine the worth of a distressed property.

Downsides of Using ARVs:

• It is an exhaustive and time-consuming process.
• It can be inaccurate if done improperly.
• Although a professional appraiser gives you the most accurate ARV, it can increase costs.

ARV helps you determine the value of any distressed property once it is remodeled. However, it requires you to fetch proper data and diligence to calculate the ARV of a property. Profit can be made if you make the right deal keeping the home renovations mind that your customer wants. To maximize the profit of your fix-up, shop around for materials to get them at discounts. Also, know your contractors and make sure they deliver quality work within deadlines and the budget as well.

FAQs

Why is ARV Important?

ARV is important because it helps determine the potential profitability of a real estate investment. Knowing the ARV of a property can help investors determine the maximum price they should pay for the property, and it can also help them estimate the potential profit they could make if they decide to sell the property after repairs or renovations.

Is ARV the Same as Market Value?

No, ARV (after repair value) and market value are not the same. Market value refers to the current value of a property in its current condition, while ARV is an estimate of the value of a property after it has been renovated or repaired.

What does “Loan to ARV” mean?

Loan-to-ARV (LTV) is a ratio used by lenders to determine the maximum amount of a loan that can be provided for a property based on its after-repair value (ARV). The LTV is calculated by dividing the loan amount by the ARV of the property.

Can ARV be Inaccurate?

Yes, ARV can be inaccurate if the calculations are not based on accurate and up-to-date information or if the assumptions used in the calculation are incorrect. It is important to use a reliable source for calculating ARV and to have a thorough understanding of the local real estate market.

How can I use ARV when Buying or Selling a Property?

When buying a property, knowing the ARV can help you determine the maximum price you should pay for the property and whether it has the potential to be profitable. When selling a property, knowing the ARV can help you price the property correctly and ensure that you are not leaving money on the table.

Conclusion

ARV Real Estate, or After Repair Value, is a crucial concept in real estate investing. It helps investors determine the potential profitability of a property by estimating its market value after necessary repairs or renovations have been made.

Determining the ARV of a property can be a complex process, but by researching comparable sales in the area, consulting with a real estate professional, using online tools and resources, conducting an inspection of the property, determining the cost of repairs, and putting all the information together, investors can make a well-informed estimate of the ARV of a property.

Understanding and utilizing ARV is an important step for making informed decisions about a potential real estate investment.