After Repair Value (ARV)
If you're going to flip properties, you need to understand ARV.
Real estate investing, particularly flipping properties, frequently requires that a purchased property be rehabilitated in some way. But you'll not be investing and flipping long if you don't know how to calculate the property's after repair value (ARV). ARV is basically what you estimate a property will be worth after you've fixed it up – what price you think it'll fetch in its new and improved condition, in other words. Experienced real estate investors know their area and markets well, have adequate home sales records similar to the subject property, and feel confident in their ability to calculate the value of the property once they've completed renovations.
Calculating After Repair Value
The ARV formula isn't that complex. Basically, it boils down to:
Property’s Current Value + Value of Renovations = ARV
But figuring those variables can get a little tricky. Of course, for current value, you can always go with the purchase price. Buying right at a deep discount is required on the front end, just as feeling confident you will have a buyer at the price you need is essential for profit is on the back end.
In between those two ends, is the fixing stage, and this is where the profits get great, but the risks are higher too. Often, fixing a property amounts just to cosmetic work and repairs, but at other times it is an extensive rehab and remodeling job.
Maximizing the Fix-Up
To get the most value out of your renovations – the crucible stage at which profit is made or lost – it's crucial to correctly estimate costs. Some steps to follow:
- Get the materials estimates right and buy at discounts. Work not only with the big box home stores, but also liquidators and rehab stores.
- Know your contractors and their capabilities. You need to supervise to the extent necessary to be sure that you're getting quality work that will be done on time and inside the budget.
- Budget based on your buyer. If you're going to be selling in the commercial market (i.e., a rental property landlord), keep the materials in the "acceptable" range. If you're selling in the consumer retail market, upgrade to finishes that buyers want.
The good news is that this isn't rocket science. It just takes attention to detail and some negotiating skills.
The final touch in arriving at your property's ARV is getting a sense of the competition – that is, what comparable properties in the local area (known as "comps" in the real estate lingo) tend to go for. This will give you a sense of what your shiny new baby might fetch. Veteran fix-and-flippers know how to evaluate these things themselves. Novices might want to use a real estate agent or realtor to do a Competitive (Comparative) Market Analysis (CMA) on the home as if all work were completed. Of course you could also use an appraiser (after all the work's finished), but generally, you'll do just as well working with a real estate person that knows their business and the area.
The Bottom Line
The successful fix & flip or fix-to-rent real estate investor must address several items carefully:
- Are you capable of doing the repair work or able to locate and properly supervise contractors in getting the work done?
- Have you accurately estimated the cost of all remodel and repair work?
- Can you get an accurate ARV estimate of the property?
if you can make the right deal on a fixer-upper and renovate shrewdly, with an eye to the features buyers want, you can make yourself a profit.