In the dynamic world of real estate, mastering the vernacular can be a game-changer. In fact, Redfin's Real Estate Glossary has over 200 different terms! Phrases and acronyms such as ARV (After Repair Value) are essential cornerstones of real estate jargon, especially for those immersed in property wholesaling, house flipping, and rehabbing.
If you've set your sights on real estate investing or house flipping, understanding the concept of ARV is crucial. This measure assists investors in estimating the potential future value of a property post-renovations, helping you make well-informed decisions and securing the right financing for property enhancements.
Whether you're a seasoned real estate investor, a first-time house flipper, or a homeowner planning improvements, the term ARV is your trusty compass guiding your journey. It helps you navigate the complexities of real estate investing and gives you a clear vision of a property's potential worth.
Our comprehensive guide will dive deep into the concept of After Repair Value - what it means, how to calculate it when it's best used, and more. This crucial real estate term could very well determine whether a deal is a wise investment or a potential pitfall. So, get ready to add ARV to your real estate toolbox and use it to uncover the true value and potential of your investments.
Remember, understanding the ARV isn't just a real estate strategy, it's the foundation of smart investing. Welcome to the world of ARV real estate!
After Repair Value, commonly abbreviated as ARV, signifies the potential value of a property once all renovations and improvements have been executed. It is a crucial term in the real estate industry, particularly for house flippers and rehabbers. In essence, it’s a forward-looking estimate that offers investors a glimpse into a property's future worth post-renovation.
ARV helps real estate investors evaluate the financial feasibility of a fixer-upper, factoring in the costs associated with purchasing the property, performing necessary renovations, and its potential resale value. The spectrum of renovations contributing to this value can range from simple tasks like installing new kitchen appliances to substantial undertakings such as roof replacement.
The ARV is not just a number plucked from thin air; it's meticulously calculated by examining comparable properties (often referred to as "comps") in the vicinity. These comparables share similar traits, such as condition, age, size, build, and style, and have been sold recently.
ARV is an indispensable tool not just for house flippers but for any real estate investment where property improvements are expected to enhance the property's value. It enables investors to strategize their exit plans and identify the most suitable real estate financing route. Essentially, the ARV paints the most accurate picture of a property's potential selling price upon completion of all planned improvements.
While experienced investors can often assess a property's ARV with a quick walkthrough and their in-depth market knowledge, beginners might find this challenging. However, fear not! This guide will equip you with the know-how to accurately calculate the ARV, even if you're new to the world of real estate investing.
ARV is important to know because it is a great tool to help fight off the unknown when real estate investing, specifically when flipping houses. Although no investor has a crystal ball, flipping houses shouldn't be a gamble. If you go into it without any tools or techniques then that's just what you're doing - gambling!
It's not worth the risk of losing thousands of dollars because you didn't determine the ARV for your flip or you simply hired an agent or appraiser. The path to becoming a successful real estate investor requires you to appraise properties, understand after repair values, and determine a purchase price that makes buying property a good deal.
Calculating ARVs with confidence is crucial when trying to flip houses, wholesale real estate, and transact in the real estate business. Instead of relying on an appraiser, real estate agent, or property manager, you need to know your numbers.
As a house flipper or investor, your money is on the line so you need to be able to confidently verify property values. Third-party valuations can be helpful, but if you want to maximize your profit potential, minimize risk, and take ownership of your decisions, then determining ARV on your own is the way to go!
In reality, flipping houses involves guesswork and speculation based on the available market information. However, a data-driven ARV is the most prudent way to run the numbers to increases your chances of being profitable.
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The people that need to know about ARV are real estate entrepreneurs and investment professionals. Given that this is one of the main ways they are able to analyze and talk about their value-add investment opportunities.
The specific types of people that can benefit from ARV include:
Once investors figure out the ARV, that's when they are able to work backward to figure out the “As Is” value should be. This reveals the current value and sales price that the investors should be willing to pay for the house they are looking to invest in.
Given that real estate investing can mean making financial decisions with uncertain outcomes, this technique helps investors mitigate risk and make more predictable acquisitions!
Not only do beginner investors require this knowledge but also long-time successful real estate investors use this technique every day! Understanding ARV is not something you pick up and let go but rather something you'll use all the way through your career in real estate investing.
Calculating the After Repair Value (ARV) in real estate is fundamental in assessing the potential profitability of a property. This process involves three key steps:
The first step involves analyzing the comparables or "comps." These are properties similar to the one you're considering in terms of location, size, style, age, and upgrades, that have recently been sold in the same neighborhood.
To access detailed information on comps, you can use a Multiple Listing Service (MLS), which is typically accessible through a real estate agent. As a rule of thumb, real estate professionals use around 3-5 comps for a comprehensive market analysis, averaging their selling prices to gain an insight into the potential ARV.
Consider the following when selecting comparables:
An accurate property appraisal is the cornerstone of a reliable ARV calculation. The appraisal provides a solid starting point before considering the value of potential renovations. It involves a thorough evaluation of the property, accounting for aspects such as overall condition, property size, amenities (number of bedrooms, bathrooms, etc.), curb appeal, and location.
Once the appraisal is done, you'll have an estimate of the property's current market value. After renovations, a post-renovation appraisal should also be conducted to determine the final market value of the property, as fluctuations in the housing market and unforeseen renovation issues can affect the final selling price.
The last significant step in calculating ARV is estimating the value and cost of the repairs. This assessment should include all the necessary repairs or improvements planned and should be as realistic and accurate as possible.
To ensure this accuracy, consider obtaining estimates from three to five licensed contractors, making sure each repair estimate is itemized. Material estimates and discounts are also factors to be factored into the calculation.
Additionally, investors must consider other costs associated with the property, including closing, holding, and financing costs. The holding costs, often overlooked, include expenses such as property taxes, insurance, utilities, maintenance, and Homeowner Association (HOA) fees.
Finally, use the basic ARV formula: Current Property Value + Value of Renovations = ARV. This gives you a comprehensive estimate of what a home could be worth after renovations, assuming no additional issues arise during the renovation process.
While the calculation of ARV involves many variables and can be tricky, a careful and well-researched approach can provide a valuable estimate for property investors.
ARV is an essential tool in house flipping, offering an estimate of a property's potential value after necessary renovations are made. This tool is invaluable for investors as it provides a starting point for estimating the property's purchase price, renovation costs, and profit potential.
With ARV loans, lenders decide on the loan amount based on a percentage of the after repair value of the property. This percentage is called a loan-to-value ratio (LTV).
ARV loans are originated by hard money lenders and private money lenders. These lenders are generally referred to as asset-based lenders because they look at the property as collateral for the loan versus the borrower's ability to repay.
Typically, hard money lenders will lend up to 70-75% LTV or 70-75% of the ARV. So, just make sure you stay around that ballpark of percentages with your all-in investment!
The ARV 70% Rule is a rule of thumb in real estate indicating that an investor shouldn't pay any more than 70% of the ARV, minus the estimated repair costs, for a fix and flip investment property. That said, don't limit yourself to solely 70% because this is just a base of what you should be aiming for. Great deals can be found at more than 70% of ARV.
Here's the 70 Percent Rule Formula to follow:
(ARV x 70%) - Renovation Cost = Maximum Allowable Offer (MAO)
Here is a better idea of the 70 rule being used in action:
ARV → $150,000
Repairs (Expenses related to renovations) → ($25,000)
($150,000 x 70%) - $25,000 --> $105,000 - $25,000 = $80,000 MAO
The $105,000 represents your all-in cost in order for it to be a profitable deal or total investment. The $80,000 represents your offer price to purchase the property before renovations.
Cost of Funding (Fees / Interest) → ($5,000)
Holding Costs (Insurance / Utilities) → ($3,000)
Resale Fees (Realtor fees around 6%) → ($9,000)
Profit → $150,000 - $105,000 = $ 45,000 - $17,000 (expenses) = $28,000
This $28,000 is your profit if it all goes accordingly to plan. So, make sure you give yourself some buffer room in your repairs budget or reserve money in case something else comes up and you need that extra cash!
The example scenario we used is known as the Maximum Allowable Offer (MAO) or MAO formula for flipping properties. Many real estate investors and wholesalers use it to evaluate their deals! Though it's not perfect, this MAO calculator is a great tool to use in order to get the numbers calculated quickly and effectively.
Determining the ARV in real estate is one of the most critical skills to master when fixing up and flipping houses in the real estate business!
The after repair value formula weighs all sorts of factors when you're looking to flip a house successfully and achieve maximum profit. Some of the areas to be concerned about the most aren't even the main home you are looking at in the first place.
In short, to find the ARV you want to "run the comps." This means evaluating all the comparable sales data near a given property, also referred to as doing a Comparative Market Analysis (CMA).
To obtain the best real estate market sales data, get access to the Multiple Listing Service (MLS). Alternatively, you can partner with a real estate agent or use one of the following property listing websites:
Consider the following when determining the ARV for a given home:
Find comparable homes in the same area to see what features they have in common and at what price they are selling for. Look at their square footage, bedrooms, bathrooms, lot size, features, and style of the home. Then, make adjustments in the value relating to the subject property.
This allows you to understand the market price of similar properties nearby. You want to know with confidence what the price of the property will be once the rehab is done and how much breathing room you have for repairs.
Try to avoid looking at homes that are currently for sale because that won't tell you what people are willing to actually pay. While active homes can help calculate ARV, sold homes demonstrate the market price that a buyer was actually willing to pay. Try to stay within 6 months back. The more recently a comparable home was sold, the better!
Even if the home you're comparing to was last sold six months ago, it is much better than a similar home that was sold one year ago. Also, don't limit yourself to just one but rather try to get a handful of comparables or "comps" before calling it a day.
Gauge market temperature by looking at days on market (DOM) for the sold comparable properties. Low average DOM indicates a seller's market and high average DOM signals a strong buyer's market. How long do properties take to sell? What're the average days on market for sold properties? Which properties sell faster and which ones take longer? Why?
This is one of the areas where amateur real estate investors make mistakes! Different locations have varying real estate values, even though the houses you're comparing have the same features.
Each neighborhood, subdivision, or HOA community may hold its own values, and buyers know that! That's why the number one rule in real estate is location, location, location! The closer the comp is to the subject property, the better. Understanding your real estate comps is key!
Here are some additional pro tips:
Following these guidelines in determining the ARV, you can guarantee a better chance of success than if you went into a flip relying on pure intuition.
Here is a quick video explaining a little more on how to determine the ARV using PropStream:
Repairs and renovations that should be prioritized when improving ARV may vary from house to house in real estate! So, knowing where to start looking will assist you in these decisions.
The ability to keep property repair costs at a minimum while making strategic improvements is often the deciding factor when flipping houses on whether you make money or not. You have to make sure you do your best in looking at the comps so you don't waste money or miss out on certain repairs.
Here are the main repairs to consider in your scope of work to improve the ARV of a house:
These are the main things you look for because they are the sole of what the house is sold on.
The highest Return on Investment (ROI) usually comes from cosmetic repairs. Cosmetic repairs include new flooring, interior and exterior paint, kitchen cabinets, countertops, new appliances, new dual pane windows, landscaping, floor plan improvements, and recessed lighting.
Also if there are items you should never go cheap on, that would have to be plumbing, roofing, foundation repairs, HVAC, and electrical. If something goes bad with that it might cost a lot more to fix then it would have to get it done right the first time around.
These tend to be the most expensive areas for your repairs, however, they have the least impact on improving ARV. Therefore, these repairs have a lesser impact on your ROI.
In the end, there are a lot of things to consider when making renovations to homes in hopes to make it a successful flip. While it pays off to focus on the visually appealing areas of the home, try not to lose track of the things that allow the home to function properly for many years to come!
Here are 4 tips to find the best houses with the highest after repair value (ARV):
When trying to find the best houses for the highest ARV, try to identify the “ugliest” houses in the nicest neighborhoods. It can be subjective on what people might think of a house being ugly so the best thing to do is to look for signs of distress, unkempt lawns, zombie houses, outdated interiors, and a lack of curb appeal.
Finding the ugliest home in a given neighborhood is always something to look out for but that isn't the main thing to buy on. The main factor to take into account when purchasing these homes would have to be the size of the home because that's where much of the home's value is derived from.
Pay close attention to the price per square foot (or dollars per square foot) because you can have the ugliest house to the eye but if the price per square foot is too high, then it's probably best to skip out on that one for now due to it leaving you with less profit potential.
Looking at dollars per square foot helps you make a wise investment decision based on the value compared to the size of the house. Larger houses will generally have a lower price per square foot than smaller houses in a particular market.
Additionally, look for properties with unique or special features that make it more desirable than others. Special features that increase ARV include a large lot size, private yard, a view, commercial zoning or zoning for multiple units (potential future development opportunities), easy access to desirable parts of town, or near freeways.
Another thing to consider when investing in real estate is buying a home in an area within the path of progress. What we mean by that is invest where new developments are planned such as new retailers, schools, new homes, freeways, and mass transit.
Check with your city's planning department for updates on any new or planned developments in the surrounding areas.
The value of a home depends on the neighborhood in which it is located. So, if there is an up and coming neighborhood where there are promising signs of development, then that home will likely go up in value. It's just in a matter of time!
If you want to find the ARV of a home on Zillow, you first want to get familiar with how to use their platform to find comps. If done correctly this will be a quick process that can take less than ten minutes to complete!
To use Zillow to calculate ARV on a house, follow these steps:
In the example below, we'll be looking for a three-bedroom, two-bath, 2,000-square-foot home in the Mira Mesa neighborhood of San Diego, CA. Here is a screenshot of what it should look like on Zillow after following the above steps.
As you can see from the screenshot there is a search bar across the top and you want to make sure you have entered the appropriate real estate comps criteria for your search, including:
From our search, we can see there are a fair amount of homes within our searches! Make sure you are looking into homes that are refurbished to calculate ARV. Not all homes are good comps. The houses to focus on may look like the following:
*Look for houses with remodeled kitchens. Updated kitchens sell houses for top dollar!
Bathrooms with quartz or granite counters and tiled showers can be great ARV comps!
Browse the listings and after finding three to five of the best comps, use the average of their values to determine the after repair value of your subject property. If homes just like yours are selling at a certain price point, you should be confident that your house will sell in that price range once it's fully rehabbed.
ARV, or After Repair Value, is a critical tool in the real estate investment industry, particularly for house flipping. However, while it offers a valuable starting point for property evaluations, it also comes with several challenges and limitations:
In conclusion, ARV provides a valuable foundation for property evaluation, but it should not be relied upon exclusively. It's important to employ a diversified approach, using a variety of tools and methods to assess potential investment opportunities. And, as always in real estate, careful and thorough due diligence is a must.
Mastering the technique of accurately determining the After Repair Value (ARV) in real estate is a key ingredient for prosperity in your property investments. The art of house flipping is not only demanding but also unforgiving of mistakes; missteps can lead to detrimental financial consequences.
As the popularity of house flipping continues to surge, refining this particular skill becomes even more crucial. It equips you with the ability to capitalize on profitable opportunities as they arise, positioning you for success in the vibrant world of real estate investment.
However, avoid being derailed by simple miscalculations or misunderstandings of the market dynamics when flipping homes! We trust that this comprehensive guide has empowered you with the knowledge to confidently ascertain the ARV, setting you on the path to carving out your own success story in this lucrative industry.
To enhance your skills further and ensure you're well-prepared for the challenges of house flipping and wholesaling, we invite you to join our FREE training course. This program will not only deepen your understanding of the real estate market but also provide practical insights and strategies to navigate the world of house flipping effectively.
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