If you’re looking to invest in real estate, the chances are good that you’ve heard the term “After Repair Value (ARV)” tossed around. ARV is an important thing to keep in mind when it comes to real estate investing, and this article’s purpose is to explain to you what ARV is and how to understand it and make it work for you.
After Repair Value plays a critical role in real estate. ARV is the estimated value for a property after needed repairs have been made and optional upgrades and renovations have been done. It has an influence on what should be paid for a piece of property when buying to repair and renovate.
This term is used frequently, though not exclusively when discussing house flipping. Many people who flip houses professionally focus heavily on after repair value. If they’re able to estimate the value of repairs accurately, they’re typically able to profit on the piece of real estate they’re purchasing.
Determining a Property’s ARV
To determine the ARV of a property, make sure that you’re paying what you should be for the property and making the maximum return on investment.
Find the Property’s Current Value
Find an appraiser to estimate the value of the house in its current condition prior to any repairs. The appraiser can accurately identify the property’s value and identify the issues that the property currently has.
This is imperative, as identifying any faults in the property should be listed so that the asking price on the house can be lowered, and the list can then be provided when getting repair estimates. It’s likely that the asking price for the house is its market value if it is a fixer-upper, but always remember to verify.
Get Repair and Renovation Estimates
With the list created by the appraiser, you’ll be able to consult with contractors to get the repair and renovation estimates. When doing so, be sure to contact multiple contractors to get competitive estimates. It’s also important to keep in mind the cost of building materials, not just labor. The contractors should be able to provide this information to you with their estimates, as well.
Then, before deciding on any renovations or repairs, it’s important to take into consideration the budget of prospective purchasers in your area. This is where comparing other properties comes into play.
It’s also important to consider upgrades that are appropriate for the neighborhood where you are purchasing the home. If the upgrades increase the cost of the house too much for the area, you run into a similar problem with the budget of the prospective buyers in your area.
The best way to get an idea of the ARV for the property you’re looking at is to compare it to the properties surrounding it. Other properties in the area that are similar in build, size and have been recently upgraded or renovated are great examples of what your property could fetch after it’s been repaired.
Here are a few things to consider when comparing properties, as well as a few tips to make it easier:
- Compare the property to others that have sold in the last two to four months.
- Make sure that the comparable properties are similar in their size and amenities. Age can also play a part.
- The properties need to be in the same area, preferably in the same neighborhood if possible.
- To make comparing easier, try to get access to an MLS, a Multiple Listing Service, which lets you compare listings in the area with ease.
- If unable to access an MLS, use tools available to the public like real estate apps.
Once you’ve been able to determine the value of the property you’re interested in by basing it on the properties surrounding it, you can start factoring in repairs and renovations.
Calculate the ARV
You can do this on your own, or you can ask an appraiser to assist you. The formula used is shown below.
Purchase Price (what you’re purchasing the property for) + Value of Renovations (the estimates received from the contractor) = ARV (After Repair Value)
This calculated value is important in the real estate investing world as it helps to define something that’s identified as the 70% rule.
The 70% Rule
The 70% rule is what real estate investors use to determine if a fixer-upper is worth investing in. It’s a simple formula used to make sure that the price you pay for the property will ensure a return on investment.
This rule uses your previous calculations to determine the cost that you should be paying for a property. Generally, the rule of thumb is that you should be looking to earn a 30% return on investment when you purchase the property. The formula is listed below.
(After Repair Value [previously calculated] x .7) – Estimated Repair Costs (provided by contractors) = Optimal Purchase Cost (the most you should purchase the property for)
Following this formula helps determine if what you’re paying for the property you plan on renovating is the right price. There are plenty of calculators available online to help the process.
Why ARV is Important
ARV is one of the most significant things to be kept in mind when purchasing a piece of property for investment. Flipping houses has become all the more popular thanks to programs shown on Home and Gardens Network television, and for a good reason. If done well, it’s a great way to make a quick return on investment, especially if you’re handy and can do some of the more minor repairs and renovations yourself.
Also very important to ARV, the entire system is based on estimates. It’s important to remember that time plays a big part in the housing market, so being sure that you can get your property repaired and renovated in a timely manner can make or break your return on investment.
Again, the 70% rule is a rule of thumb regarding these kinds of purchases, but it’s important to keep in mind that there can be exceptions to this rule. For example, if after the ARV has been determined and the 70% rule is observed, the profit is not a 30% return on investment, then the house you’ll be flipping may not be within your budget.
A way around this may be to offer lower than the asking price for the house. The worst they can do is say no.
Other Possible Costs
When looking to purchase a property as a real estate investment, there are more costs than just the cost of the house and the repair and renovations to consider. The ARV formula does not take into account the other costs that come with purchasing property, such as closing costs, insurance, and other fees that can add up over time as the house is made ready to sell.
Time is key, and it is important to complete your renovations quickly so as to avoid the costs that can pile up. It’s also important to make note that if the market dips during your renovations but is expected to rise again, holding the house after renovations may see more money put into your pocket after all.
Annual Retail Value and After Repair Value
After repair value is one of two common terms used in the real estate world associated with the acronym ARV, the other being annual rental value.
This is used when discussing rental properties and is used for determining the cost to occupy a property for a year. Annual retail values is still a valid term, but not one that would come up related to flipping houses or investing in a property.
Things to Remember
When looking into ARV and the flipping market, there are a few key things to remember before making a purchase that has been mentioned in this article.
- The after repair value is entirely based on estimates, and therefore, may not be accurate and could be subject to change.
- Make sure to get a thorough inspection and appraisal. Your appraiser is critical in determining the ARV of a property you may be interested in purchasing.
- Know the surrounding market and understand the necessary repairs, renovations, and upgrades that the property should undergo to sell.
- Get multiple estimates on the repairs and renovations, anywhere from three to five. You want to make sure that you get the best price for the work being done to increase return on investment.
- Adhere to the 70% rule in most cases. If the property does not yield a return on investment that makes sense, think again about purchasing the property.
Following the above guidelines can help you understand ARV in real estate and help you gain the largest return on investment if things work out correctly.