What Is After Repair Value (ARV) in Real Estate?
How to Calculate ARV—The Equation and What It Means to Your Profits
Real estate investing, and particularly flipping properties, often requires that a property must be rehabilitated in some way before sale. You won't be investing and flipping for very long if you don't know how to calculate the property's after-repair value. ARV is basically what you estimate a property will be worth after you've fixed it up—the price you think it will fetch in its new and improved condition.
Experienced real estate investors know their areas and their markets well. They have adequate home sales records similar to the subject property, and they feel confident in their ability to calculate the value of the property after they've completed renovations.
Calculating After Repair Value (ARV)
The ARV formula isn't complex. It basically boils down to:
Property’s Current Value + Value of Renovations = ARV
But figuring these variables can be a little tricky. You can always go with the purchase price for current value, but buying right at a deep discount is required on the front end. Feeling confident that you'll have a buyer at the price that's essential for profit is on the back end.
The fixing stage is somewhere in between, and this is where profits are made. But the risks are higher, too. Fixing a property often amounts just to cosmetic work and repairs, but sometimes it can mean an extensive rehab and remodeling job.
Maximizing the Fix-Up
It's crucial to correctly estimate costs to get the most value out of your renovations.
- Get the materials estimates right, and buy at discounts. Work not only with the big box home stores but also with liquidators and rehab stores.
- Know your contractors and their capabilities. Supervise to the extent necessary to be sure you're getting quality work that will be done on time and inside the budget.
- Budget based on your buyer. Keep the materials in the "acceptable" range if you're going to be selling in the commercial market. Upgrade to finishers that buyers want if you're selling in the consumer retail market.
This isn't rocket science and it doesn't have to be intimidating. It just requires attention to detail and some negotiating skills.
Find Your Comparables
The final touch in arriving at your property's ARV is getting a sense of the competition—what comparable properties ("comps") in the local area 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 ask a real estate agent to do a comparative market analysis (CMA) on the home as if all the work had been completed.
Of course, you could also use an appraiser after all the work's finished, but you'll generally do just as well working with a real estate person who knows her business and the area.
The Bottom Line
The successful fix-and-flip or fix-to-rent real estate investor must carefully and honestly assess several factors.
- Are you capable of doing the repair work yourself, or are you 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?
You can realize a profit if you make the right deal on a fixer-upper and renovate shrewdly, with an eye to the features that buyers want.