ARV: Everything You Need To Know About After-Repair Value
June 13, 2023 7-minute read
Author: Sidney Richardson
If you’re thinking about flipping a house or even just planning to remodel your own home, you may have heard of after-repair value, also known as ARV. After-repair value is a measure used by real estate investors and house flippers to estimate the future value of a property after renovations.
Experienced flippers can calculate ARV to predict the future value of a home and secure financing for repairs. This method of assessing value can be very valuable to regular homeowners, too, if they’re looking to make changes to their house that will increase its value.
So, what exactly does ARV mean? If you’re interested in learning more about ARV and how to use it, read on for our guide to after-repair value.
What Is After-Repair Value (ARV) In Real Estate?
ARV is the estimated value of a property after completed renovations, not in its current condition. House flippers commonly use ARV as a way to gauge the worth of a fixer-upper property, including how much it can be bought, and then resold for after repairs. The repairs or renovations can be anything from installing new kitchen appliances to replacing the roof.
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Why Is ARV Important?
Since some investment properties may not be in the best condition, house flippers and investors probably won’t want to purchase them at market value if they hope to turn a profit. Instead, they can use ARV to buy a property at a discounted purchase price, considering the cost of future repairs.
ARV can also be used to secure a loan for the cost of actually “flipping” the house. Some lenders offer renovation mortgages, or loans specifically for home renovations, with the maximum loan amount being around 75% of the ARV.
Non-flippers can make use of ARV, too. If you’re renovating your home, calculating ARV can give you a good idea of how much value your renovations will add to your house.
How To Calculate ARV
The basic ARV formula is fairly simple:
The Property’s Current Value + The Value of Renovations = ARV
With this formula, you should get an idea of how much a home could be worth after renovations, assuming everything goes according to plan and additional issues don’t come up during the renovation process. If your home is worth $150,000 and the estimated value of renovations is $30,000, for example, you would come up with an ARV of $180,000.
However, the basic formula doesn’t consider a few things that are needed to make a fully informed ARV estimate. If you intend to use ARV to come up with an offer for a property or to secure financing for repairs, you’ll want to also do the following:
1. Evaluate The Comparables
Comparables, or “comps,” are properties similar to the one you are renovating or flipping that have recently sold nearby. Real estate comps can be most easily found on a multiple listing service (MLS). If you’re not highly experienced with calculating ARV, you may want to contact a real estate agent for help since they have access to an MLS and knowledge of comps in your area.
Comps should be:
- In the same neighborhood as the house you’re renovating
- A similar square footage and style of the property
- A similar age to the property
- In similar condition to the property (in terms of upgrades)
By looking at the sale prices of a few comparable properties, you can calculate ARV a little more accurately by considering what is typically paid for the renovations you plan to do on the property.
Most real estate professionals use around 3 – 5 comparable properties for an efficient market analysis and average their selling prices to get an idea of what their own ARV should look like. If you find four similar properties and their sale prices average around $170,000, that would be a good estimate for the future value of the property you’re renovating, once it has the same upgrades.
2. Appraise The Property
One of the most important things you can do to calculate ARV more accurately is to have your home appraised. Knowing the current value of your home helps give a better idea of what your property is worth before the value of renovations is added.
Once you hire an appraiser to look at your property, they will evaluate every part of the home, including but not limited to:
- Overall condition
- Property size in square feet
- Number of amenities, including the number of bedrooms and bathrooms
- Curb appeal
Once the appraiser has checked out every aspect of the home, they can give you an estimate of the current value. Knowing the current value of your home can give you a more concrete starting point when calculating your ARV, which will make the value you come up with more accurate.
You will want to have the property appraised after completing renovations as well. Your home may be appraised at a higher or lower value than what the ARV was estimated to be. Since the housing market fluctuates and things can come up during renovations, it’s important to do an appraisal post-renovation to come up with an accurate listing price for the property.
3. Assess The Value Of Repairs
Though an appraiser mainly looks at your home to determine the market value, they can also point out repairs that need to be made and potentially even what those repairs will cost. Finding anything that might need fixing in addition to your planned repairs will prevent you from encountering unexpected costs after already calculating and using the ARV.
It’s important to stay realistic when estimating the cost and value of repairs. ARV can be tricky to calculate since so many factors play into it. Still, if you work with the appraised value of your home and account for all repairs as well as comparable properties, you should be able to settle on an ARV estimate.
What Are The Risks Of An ARV?
Estimating ARV can be helpful to real estate investors looking to determine an offer price or decide whether renovating a property is worthwhile or not. Because it’s an estimate, however, ARV does have some limitations, not to mention risks.
ARV Only Shows A Snapshot In Time
ARV only accounts for the value and potential value of a property during the time window in which it is estimated. Even after looking at comparable properties and checking for repairs that may need to be made, things can come up and change the value.
Renovation costs could end up being more than initially planned if additional damage to the home is discovered.
Value Fluctuates With The Real Estate Market
In addition to unexpected costs, the housing market can fluctuate, too. The value of comparable properties that you may have used to determine your home’s ARV can go down, devaluing your own renovations. Additionally, if the comps you looked at weren’t fully accurate or comparable to the home you renovated, you could end up with a sale price far lower than what you expected it would be. In this case, you could end up paying far more for a property than it ended up being worth.
Results Are Based On The Appraiser’s Opinion
Appraisers may value certain aspects of a property differently than a flipper or investor would, which could cause your home’s value to be lower than expected. There is always the risk that the property will be worth considerably less than the estimated ARV when it’s appraised post-renovation.
ARV being an estimate, regardless of how well researched the estimate is, means that there is always a chance that you’ll put more money into a home than it’s worth.
How Is ARV Used In The House Flipping Business?
With the limitations and downsides of ARV in mind, it may seem risky to estimate the value at all. In the house flipping business, however, ARV is still a handy rule of thumb, despite the potential for loss that comes with it.
As mentioned earlier, flippers often use ARV not just to guess the future sale price of a home but to also buy the house for a discount and secure the funds for repairs. Getting the property at a lower price can help alleviate some of the risks. If extra costs come up during the renovation, it won’t be the difference between making a profit and losing money on the investment.
How do house flippers know how low they can go on their offer? Many use a formula called the “70% rule,” which uses ARV and the cost of planned repairs to determine the ideal price an investor should pay when buying an investment property.
What Is The 70% Rule?
The formula for the 70% rule is:
(ARV x 70%) – Estimated Repair Cost = Maximum Purchase Target
This formula is meant to help real estate investors come up with an offer price for a house that’s lower than market value, but high enough to be competitive and accepted by the seller. The 70% rule is not a one-size-fits-all formula, so it may need to be adapted for higher or lower-end markets across the country. Additionally, since it’s calculated using an estimated ARV value, the 70% rule shouldn’t necessarily decide what your final offer will be – additional research and help from a real estate professional is advised, especially if you’re new to flipping houses.
70% Rule Example
As for an example of the 70% rule, if your after-repair value is $260,000 and the cost of repairs will be $30,000, the formula would look like this:
($260,000 x 70%) - $30,000 = $152,000
In this example, the most you’d want to pay for the home to still make a profit after renovations would be $152,000.
When using the 70% rule, it’s important to note that the “leftover” 30% in the equation will not be all profit for the investor. Much of that 30% will go toward additional renovation costs and fees for buying and selling the property.
The Bottom Line
ARV can be a helpful tool for house flippers and homeowners looking to increase the value of their property and ensure a healthy return on investment when it’s time to sell. Since it’s an estimated value, it does carry risks – but may prove useful all the same if you’re looking to get the most bang for your buck on a fix and flip.
If you’re ready to move forward with buying an investment property, get approved with Rocket Mortgage®.
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