What is the value after repair?
If you’re considering owning or investing in residential real estate, there’s a term you need to add to your repertoire: “After Repair Value” (often abbreviated as “ARV”). Simply put, the ARV is the present value of a home after repairs or improvements have been made to it, taking into account its original purchase price and the amount spent on the renovations.
Often, ARV is discussed in the context of house flipping, but it is also beneficial for individual home hunters and real estate investors to understand. Here, we’ll explain the basics of ARV in real estate, including what it is, how to calculate it, and who should use it.
What is After Repair Value (ARV)?
When a person decides to flip a house, they first buy the property and then invest in renovations to increase their offering price in the market. ARV is simply the new and improved value of this property – after the pinball has done all the upgrades, repairs and renovations you want.
Why are ARVs important? Because savvy palmers only want to invest in properties they know will generate a profit – and ARV can help them make that decision.
“ARV considers the value of the final rehabilitated property and works as a way of knowing how much money should make sense to invest,” says Martin Carreon, real estate broker and owner of SoCo Wine Country Properties, a real estate agency in Santa Rose, California.
In short, ARV is a useful tool to help flippers and other real estate investors decide whether a particular home is worth buying and renovating based on its potential value and profitability. If you are looking to buy a house to live in, this can also be useful, especially if you are looking for repairers.
How to calculate ARV
If you need to calculate the ARV on a particular home, use the following method to get a rough estimate. If you need a more precise figure, be sure to work with an appraiser.
1. Look at comparable properties
Your first step is to find five (or more) comparable properties – also called comps – that have recently sold in the area where the home is located. You can find these listings on real estate sites like Realtor.com or your local MLS, or work with a realtor to find out if they’ve seen homes similar to the one you’re interested in.
With comps, it’s best to find homes that are as similar to yours as possible in location, age, size, condition, and style. Ideally, these homes will have been sold within the past few months or within the past year.
The more specific these factors are, the more accurate you can calculate an ARV.
2. Determine the price per square foot
Next, divide the selling price of each component by the total square footage of the home to determine its square foot value. For example, if a comparable 2,500 square foot property sold for $500,000, its price was $200 per square foot. Run this calculation on each of the compositions, then calculate an average on each of them.
3. Plug the numbers into the ARV equation
Once you have gathered this information, you can incorporate it into the following formula:
Average price per square foot (across all comps) X square feet of property = ARV
Let’s walk through an example. Suppose we have our eye on a 2,000 square foot repairman. Let’s say we found five comps — similarly sized homes recently sold in the neighborhood — that had an average price per square foot of $150. We would multiply $150 by 2,000 to determine that our targeted home’s ARV is $300,000.
ARVs and the 70% rule
While just knowing a home’s ARV is helpful, it’s even more powerful when used in conjunction with the 70% rule, which is a general real estate guideline intended to help pinball machines determine the maximum amount they should spend on a house in order to make a profit.
Specifically, the 70% rule suggests that a flipper should only buy a property if its price is at or below 70% of its ARV (excluding the cost of renovations). The formula to calculate this is:
(ARV X 0.7) – estimated cost of renovations = maximum bid price
Continuing with the last example, let’s say our ARV is $300,000 and we plan to spend about $50,000 on repairs and upgrades. To find the maximum bid price, we would first calculate 70% of $300,000 – or $210,000 – and then subtract the $50,000 repair costs. Therefore, our maximum offer price should be $160,000.
Who uses ARVs?
ARV is incredibly valuable to palms and real estate investors. For them, the main objective is to buy a house at a low price, spend the money to renovate it and put it back on the market at a much higher price. In most cases, there is no intention to live there themselves.
“Fix-and-flippers uses ARVs to understand the viability of a project,” says Dennis Shirshikov, strategist at Awning.com, a real estate brokerage firm for investors. “Traditional investors often see this as ’embedded capital’, as repair costs increase the value of the property beyond the mortgage.”
Mortgage lenders also rely on ARV in Real Estate to gauge how much money they are willing to lend to flippers, investors and homeowners for their home improvement projects. Basically, the more a home will be worth after repairs, the more money buyers can borrow through a home improvement loan.
Last word on ARVs
ARV is a handy tool for flippers and real estate investors to understand two main things: whether a home is worth flipping and, if so, how much the property might sell for after renovations. It can also give home hunters an idea of whether the repairer they are considering is a good deal at its current price and how feasible it is to obtain financing for the remodel.
That said, it is important to remember that ARV is not an official price or a guaranteed figure. Instead, it’s an estimate based on a series of educated guesses. The actual value of a home will vary depending on the components chosen to calculate the ARV, the local real estate market, and actual renovation costs, to name a few factors. And, of course, some of the variables may change during the transaction process. Yet ARV can be a starting point for answering that all-important question: is a particular property a good buy – or a money pit?