Looking to start flipping houses? Then, one term you’ll hear a lot is the after repair value (ARV). Finding this value is crucial to every house flipping project as it will help determine its profitability. Keep reading as we explain what ARV real estate is and how you can calculate it to ensure that your fix-and-flip deal will be successful.
What Is ARV in Real Estate?
In the world of real estate investing, ARV stands for After Repair Value. It is the estimate of a distressed property’s value after it is fully renovated. Home renovations include any cosmetic work, repairs, rehab, or remodeling work. ARV is mostly used by fix-and-flip real estate investors to predict how much a fixer upper property will be worth once it’s in its improved condition. It also helps them measure whether or not there’s enough margin for the flip to become profitable.
Determining the after repair value is a very important step in every house flipping project. It’ll not only tell you how much you can expect to sell the property for once you’re done repairing it, but it’ll also give you an idea of how much you should buy it for and how much you need to spend on renovations. Without calculating ARV, you risk wasting a lot of time and money on your fix-and-flip project. So let’s take a look at the after repair value formula.
After Repair Value (ARV) Formula
The after repair value formula is:
ARV = Property’s Current Value + Value of Renovations
There are two main components to the after repair value formula. The first component is the investment property’s current value: this is the value of the property in its current condition. It’s usually the same as the property’s purchase price, i.e. the price you pay to acquire the property before you begin working on it. The second component is the value of renovations: this is the added value of the investment property after it’s renovated.
How to Calculate ARV
There are 3 main steps to calculating an investment property’s after repair value.
Step 1: Estimate the Property’s Current Value
The first step is to estimate the subject property’s current value, which is also known as the as-is value in real estate. It’s recommended that you have a professional appraiser do it for you. Real estate appraisers are experts at valuing real estate properties. They know very well what to look at in a property and can identify any defects or issues that may affect the property’s value. They will, therefore, provide you with a highly accurate estimate of your investment property’s current value.
Step 2: Estimate the Value of Renovations
The second step in calculating ARV is to estimate the value of renovations. But first, you’ll need to estimate the costs of the renovations, i.e. how much money you’re going to be spending on renovations. This will help you determine your project’s profitability: your costs must be less than the value of renovations in order for you to make a profit.
It’s very important that you estimate these costs accurately so you can get the most value out of your renovation works. Here are some tips that can help you determine your repair costs and value of renovations:
- Get estimates from several contractors – at least three – to see if they all come up with a similar number. Ask them to prepare an itemized list of all the repairs needed. This will allow you to make comparisons between the different costs. However, don’t hire just any contractor! Make sure the contractors you work with are qualified and experienced so you can be sure to get quality work done.
- Get the material estimates right. We recommend using a building materials calculator to calculate how much materials you’ll need to do the home repair job. Check all your local home stores and look for materials that can be bought at an acceptable price range. It’s always best to buy at discounts.
- Base your budget on your housing market’s buyers. It’s important that you examine your local real estate market so you can understand what kind of home quality the market’s buyers expect. This can help you avoid over-repairing your investment property and wasting money.
But there are more expenses to flipping a property than just the repairs and renovations. You might also need to take into account other costs such as closing costs, holding costs, financing costs, and the cost of marketing the property. And if you’re planning on hiring a handyman to do the renovation work, don’t forget to include labor costs. For this, you need to factor all labor costs into their quoted hourly rate and estimate how many hours the repairs will take.
Step 3: Perform a Comparable Market Analysis (CMA)
Now that you’ve got both components of the ARV formula, the final step is to calculate the subject property’s ARV and check your number by finding real estate comparables, or real estate comps as they are commonly referred to as. These are either recently sold or up-for-sale properties that are similar to your investment property. This step is known as comparative market analysis (CMA).
In a CMA, you should look for house comps that you expect your subject property to look like after renovations. Ideally, you’ll want to find comps that are:
- within 1 mile of the subject property
- located within the same block or same neighborhood
- similar in age, size, square footage, and number of rooms
- sold within the last 2 to 4 months.
You want to make sure that the after repair value you calculated is in the same range as the value of the real estate comps. If your ARV number and the value of the house comps don’t match, then it could either mean that you’ve made an error in your calculation, or that your fix-and-flip project will not make a good real estate investment.
Now you might be wondering: How to find real estate comps? Well, a good source of comps is the Multiple Listing Service (MLS). You can partner with a real estate agent or broker who can give you access to the MLS. However, if you prefer finding house comps by yourself rather than asking a real estate agent to help you out, then the most user-friendly platform to do that is Mashvisor.
How to Find Real Estate Comps with Mashvisor
Using Mashvisor, you can search for the city of your choice and get all the important real estate metrics for all major neighborhoods in that city (such as median property prices, rental income, cash on cash return, cap rate), as well as real estate comps for each neighborhood. This allows you to compare different neighborhoods simultaneously and decide which one best matches your investment goals.
After choosing a neighborhood, you get to see all the investment properties listed for sale in that neighborhood. Once you click on the investment property you’re interested in, you will get access to comps that are similar to that property. You will see a list of property listings with the percentage of similarity to the property you’ve chosen, the distance from it, as well as other useful figures. There is also the option to filter your property search by number of bedrooms, number of bathrooms, square footage, property type, and budget, which allows you to get the most accurate comps in the neighborhood.
The great thing about Mashivsor is that you don’t have to worry too much about real estate comps. Thanks to its investment property calculator, Mashvisor will help you perform a complete investment property analysis so you can evaluate the performance of your subject property. It provides you with the median property price, the expected return on investment (as cash on cash return and cap rate), costs, and expenses associated with the property. It also provides you with the optimal rental strategy for that property (traditional or Airbnb rental) – if you ever plan on renting it out before selling. All the figures provided by Mashvisor are based on comparative analysis and actual data from nearby properties, which means they are highly accurate and reliable.
You Should Also Know About the 70% Rule
There is a general rule of thumb that real estate investors use to determine the price that they should pay for a fixer upper property. It’s known as the 70% rule. It calculates the maximum bid price on the property by taking into account both its after repair value and the expected costs of its repairs. The 70% rule formula is as follows:
Maximum Purchase Target = ARV x 70% – Estimated Repair Costs
The 70% rule states that investors should not pay more than 70% of the ARV of the investment property, minus the expected costs of repairs. This is to ensure that they make a 30% return on their investment.
Let’s illustrate the 70% rule with a basic example. Let’s say that the after repair value of your property is $200,000 and that the costs of repairs are estimated to be $30,000. Therefore, the maximum price that you should pay for this property is:
Maximum Purchase Target = $200,000 x 70% – $30,000
Maximum Purchase Target = $110,000
This means that you shouldn’t be paying more than $110,000. If you pay more than this, you risk losing money on your house flipping project. If, on the other hand, you pay less than this number, you’ll be sure to make a profit.
You now know what ARV means and how to calculate it. You can, therefore, start looking for fixer upper properties to flip. Try the Mashvisor Property Marketplace! Just make sure to follow the steps mentioned above so you can be sure that your fix-and-flip deals will be successful.