When you have to buy an investment property, one of the most important number you have to know is After Repair Value (ARV). You can’t make any offers without accurately knowing ARV.
We’ll dive in and explain exactly what it is, how to calculate it and when to use it, and things to keep in mind when using ARV.
What is After Repair Value (ARV)?
The After Repair Value is the value of a property after it’s been repaired, improved or fixed up. It’s the future value after upgrading a property. ARV is a critical number for real estate investors who renovate properties to add value. It helps determine the difference between the “as-is” value and its price after repairs.
Why do you need to know the ARV?
No matter what your exit strategy is when buying an investment property, the After Repair Value helps you determine if the property has enough margin to make a profit.
Knowing the ARV helps you make offers that make investment sense. It helps you buy properties at prices that account for repairs and improvements, as well as costs involved in selling the property.
If you’re a wholesaler, ARV helps you leave enough room to make money when you wholesale it, and still have enough for the person doing the repair.
If you plan to buy and hold the property, then ARV helps you know how much equity you’ll have in the deal. This will be important if you plan to refinance the property, pull out some money and move on to the next deal.
How do you calculate After Repair Value?
You can calculate the ARV of a property by looking at similar properties that have sold in the area in the last 90 days. Some people push it to 6 months.
These properties must be as similar to the subject property as possible, such as
- Location – ideally the same sub-division, neighborhood, if possible, within a mile
- Condition of the property – upgrades, features, etc
- Age – ideally within 10 years
- Size – within 250 square feet of the subject property is acceptable
- Same construction style – such as wood, brick, etc
- Single story vs one story
Once you have around 4-6 similar properties, you can calculate the price per square foot, and calculate the price for your property. This is the most accurate way of calculating ARV.
For example, if the average price for 6 properties was $150,000 and the average size was 1700 sq. ft, the average price/square foot is 150,000 / 1700 = $88.2/sq. ft. If your house is 1800 sq. ft., its ARV would be 1800 x 88.2 = $158,760.
You can also average the price of the comparison properties. For example, if you found 4-6 properties that were renovated and sold in the last 90 days, and their average sale value was $150,000, you can estimate the ARV as $150,000. Of course, this is less precise than price per sq. ft.
Can you estimate ARV on your own?
It’s easy to do the homework yourself and determine comparable sales. You need about 20 minutes to get some fairly accurate ARV from comparable sales, when you get used to it.
If you have one of our Interactive Real Estate Investing Websites, you can use the integrated feature to estimate ARV from comparable sales using Zillow.
Once a property has been submitted, head over to the “Motivated Sellers” section in your virtual back office.
Click to “Edit” the property, then scroll down to the bottom tabs and click on “Analysis”.
From here you can estimate its ARV within a few minutes.
You can also download the comps if you need to:
You can also use a Realtor who can pull comparable sales for you. Most experienced Realtors will quickly know the value of a house just within a few minutes.
If you plan to use a bank to finance your purchase, there’ll be an appraisal of the property. A real estate appraisal is a professional opinion of the value of a real property. Whenever a mortgage lender is involved in buying or selling, or refinancing of a property, an appraisal is required.
You can only use the appraisal value as the After Repair Value if the property is already repaired.
Using After Repair Value in real estate investing
Most real estate investors don’t want to purchase fixer upper properties at market value. They want to purchase at a discount. ARV helps in making good offers.
The most common formula is the 70% rule in house flipping, which dictates that you should pay no more than 70% of the After Repair Value minus repair cost when buying an investment property, i.e.
Maximum Offer = 70% ARV – Repairs
For example, if the ARV of a house is $150,000 and it needs $15,000 in repairs your offer would be
$(150,000 X 0.7) – $15,000 = $90,000
In this case, $90,000 would be your highest offer, so your offer should be ideally lower in case you need to negotiate.
I personally make my offers at 65% ARV – Repairs since I wholesale most of my properties. Depending on circumstances, sometimes I offer lower. Some real estate investors offer as high as 75% ARV – Repairs.
Of course, you need an accurate estimated cost of repairs to use this formula. You should account for most repairs including
Minor improvements – such as carpet, paint, counter tops, light fixtures, kitchen cabinets, etc
Major repairs – such as roof, foundation, plumbing electrical, etc
If you have an Interactive Real Estate Investor Website, you can use the integrated Rehab Estimators to make quick repair estimates.
From the “Analysis” tab, click on “Rehab Estimator” where you can choose between the “Basic” and the “Advanced” depending on how detailed you need to be.
You can also save your estimates for future reference.
How to protect yourself from bad After Repair Value
A bad ARV can sink you. If your ARV is unrealistically high, or you under-estimate repairs, you can end up offering too much, and making a loss.
I prefer to estimate my After Repair Value conservatively, and over-estimate repairs. This way, it’s pretty hard to be burned by poor estimates.
You also have to take into account uncertainties in the market, such as the effects of the current covid-19 pandemic.
Can you really tell accurately estimate what the ARV of a property will be a few months, 1 or 2 years from now?
Nobody really can know how the market will play out.
For this reason, I only buy at 60% ARV – Repairs.
In the current pandemic, allow 10-15% error rate when you’re calculating ARV. This way, you won’t be taken by surprise if the house values drop beyond what you expected.
The “Deal Analyzer” in our Interactive Real Estate Investing Websites has all these calculations and helps you avoid costly mistakes.
Also, in a recession, demand for houses can go down, meaning houses will stay on the market longer than normal. This will add to your holding costs if you plan to sell.
I’d estimate a holding period of 90 days just to be on the safe side. When all is said and done, you’ll still have room for a good profit when you sell.