After Repair Value (ARV): What is it? How is it calculated?

If you desire to venture into real estate investing, specifically house flipping, then after repair value (ARV) is a concept you must understand. In this article, we will be discussing what an ARV is and how it can be calculated.

What is after repair value (ARV)?

An after repair value simply refers to the value of a property after it has been renovated, rehabbed, or improved. It is also referred to as the estimated future value of a property after it has been improved. The value is usually determined by making comparisons with comparable properties (comps) in like condition, size, age, style, and build that were recently sold.

ARV is common among rehabbers whose interest is to fix and flip homes. This real estate technique can also be applied to other types of real estate investments that require improvements or renovations to increase in value.

How to calculate ARV

ARV is calculated by making reference to comps in the multiple listing service (MLS) that were recently sold. Comps or comparable properties must be similar to the property in view such as:

• The current condition of the property

• The age of the property (preferable not more than 5 to 10 years difference).

• The size of the property (ideally within 250 square feet of the property in view).

• The construction and style of the property

• The location of the property (preferably within the same neighborhood or subdivision).

Ideally, most real estate professionals and investors prefer to get three to six comps of not more than 90 days prior. However, sometimes investors may have to use comparable properties of six months prior.

Once the necessary comparisons have been made, the after repair value (ARV) is calculated by averaging the sales of the price of comps. For example, if you found three comparable properties to compare your subject property, and they averaged $180,000, the average becomes your ARV. The ARV can be used to determine the price of the property once a repair has been completed.

Another way to calculate the ARV of a subject property is to determine the average per square foot price (i.e. total sales price divided by the total square feet of the property), multiplied by the number of square feet in the subject property. For example, if you find three comparable properties with an average square foot price of $130. If the subject property square feet is 1,100, then your ARV will be $143,000.

Determining the value of a property after repair may be quite complicated as it requires skill and expertise. However, there is the option of using a professional real estate agent to get the comparative market analysis (CMA).

Applying the ARV formula in real estate investing

Some investors who go for devalued properties purchase such properties at a discount from its current value which will account for the repair cost. The standard after repair value (ARV) formula most rehabbers use is:

70% of the after repair value – repair cost = maximum offer price

Example:

If a property has an ARV of $200,000 and the estimated repair costs amount to $30,000, the rehabber will apply the formula:

($200,000 x 70%) (ARV) - $30,000 (estimated repair cost) = $110,000 (maximum offer price).

The maximum offer price is the most the investor will agree to pay for the property. The investor must have done his homework before approaching the seller of the subject property. Typically, the investor starts with the lower purchase price until they get to the maximum offer price.

The 70% formula is the most common in the market, however, some rehabbers go as high as 75% or 80% of ARV depending on the market. When percentages go higher, profit margins and risks will be greater.

Another key thing that investors give attention to while negotiating the price of a devalued property is accountability for every expense relating to the repair of the property such as:

• Necessary cosmetic improvements

• Structural improvements

• Holding costs utilities

Using ARV for Fix-and-Flip

ARVs can also be used to get financing for fix and flip, not only formulating an offer. Some private lenders that offer loans for rehabs, specifically give a maximum loan of 65% of the ARV. Therefore, it the ARV of a property is $200,000 the lender would only give 65% of that amount.

Some fix and flip wholesalers use the regular 70% ARV rule. Although sometimes their ARV estimations and repairs are incorrect, while other times they are correct. It is best to also recalculate the ARV using the same formula just to be sure.

The ARV is an essential tool that helps real estate investors determine the worth of an investment property and a starting offer. The validity of ARV is determined only if the comparable properties used are accurate. Your calculations may be off base if you underestimate repair costs or used poor comparable properties to get your ARV. The implication of this is that you may put more money into a property that is not worth it.