What Is After Repair Value (ARV) ?
How to Calculate After Repair Value (ARV)
In the real-estate flipping business, After Repair Value (ARV) is the value of a property after you have conducted repairs and are ready to sell. It takes into account the total cost of repairs and the estimated value of the home.
Individuals and businesses that buy houses for repair and eventual resale are known as real estate flippers. Experienced flippers know their areas and their markets well. They are also real estate investors—they buy houses, repair them, and sell them in a calculated hope of a profit.
The ARV is used by flippers with an adequate home repair and sales experience to estimate value. These business owners often have general contracting and real estate licenses—which are useful to be able to work on and sell the house themselves, but is generally not required—and feel confident in their ability to calculate the value of the property after they've completed renovations or are otherwise ready to sell.
What Is the After Repair Value (ARV)?
The ARV is not as much a book value of a property as it is an educated estimate of a property's current value. Real estate investors generally have an informed opinion of the houses they are purchasing or repairing, and what they could be worth over time, or when repairs are complete.
If repairs are necessary, the investor takes their estimate of the property's current value, and adds the cost of the repairs (or the estimated cost), resulting in the home's ARV.
How Do You Calculate After Repair Value (ARV)
The ARV formula itself isn't complex. The formula is:
The property's current value is the amount the investor purchased the house for, and the total renovation cost is the value of renovations made or an estimate.
How the After Repair Value (ARV) Works
Establishing the variables for the equation can be tricky. A property's current value reflects its current condition. The investor must be able to pay as far under the current value of the home to maximize their profits when they sell it.
Renovation estimates are the riskiest aspect of investing in a home repair. There may only be the damage that can be seen, or there might be much more damage that cannot be seen until other repairs begin.
For example, assume a flipper estimated a home's value based on new siding, carpet, and a roof replacement. When they had the carpet pulled up it was noticed that there was mold behind the baseboards. Upon further investigation, they found black mold in the walls of every room in the house. This drastically changed the renovation estimate of the property and increased the ARV of the home.
Buyers may not be willing to pay the increased value of the home, since they may not understand or account for the dollar value of the repairs that had to be made—an appraiser may not either.
Another consideration for a property's ARV is getting a sense of the competition—what comparable properties (known as comps in the industry) in the local area tend to go for. This could help you adjust your asking price when repairs are complete and you are ready to sell.
Limitations of the After Repair Value (ARV)
The ARV is a calculation of a snapshot in time—the value of the property under the current housing market conditions and the home's state of repair at the time of calculation. This value can change daily throughout the renovation cycle of a home.
The housing market can fluctuate, causing comparable home values to go up or down. Renovation costs can vary depending on the damage found—it might be less or more than estimated.
An appraiser might make different assumptions and value certain home aspects differently than an investor or realtor. Since every lender wants a current appraisal, this can cause a loss for an investor if the appraiser decides the value of the property is less than estimated.
The return for the investor also depends upon their ability to negotiate the most beneficial purchase and selling price for themselves. If they are good at estimating repairs but not at price negotiation, they could lose large amounts of money to buyers if the appraisal value was lower than their calculated ARV. They would need strong negotiating skills to convince buyers that the home was worth more than the appraisal value.
The After Repair Value (ARV) of a home, while simple to calculate, depends on many variables.
- The ARV depends on accurate repair estimates, compensating for all the variables.
- An appraiser can severely damage returns with a low value. This makes it important to know the local market and overall market conditions.
- The investor must be able to take into account possible losses from unforeseen circumstances when estimating.