In the real estate business, there are plenty of acronyms and lingo that may sound like a foreign language. In fact, Redfin's Real Estate Glossary has over 200 different terms!
Real estate investors, in particular, seem to have their own way of speaking that leaves most real estate agents scratching their own heads.
Wholesalers, house flippers, and property rehabbers pay special attention to a term that has a major impact on their business and that's ARV! If you want to learn more about flipping houses, this acronym is definitely something you should get familiar with!
Understanding a property's ARV can save you a ton of money and give you peace of mind knowing you are making the right investment decision. Without it, you are playing a dangerous game that could lead you devastated.
That's why we are providing you with this in-depth article to help ensure you make the right moves in this simple yet complex real estate investing business!
Read on and Enjoy What Is ARV? The Ultimate Guide! (Use this menu to jump to your section of choice:)
The letters ARV stand for “After Repair Value”. ARV is the market value of a property after all repairs and modifications are completed to its best possible condition.
The goal of calculating the ARV is to decide on an expected price that a home can sell for after a full renovation is completed. Investors often work backward from the ARV in order to decide what a property is worth in its current condition or its "As-Is" Value.
Real estate investors buy houses, fix them up, and sell them for a profit margin. This form of investing in the real estate world is called flipping houses!
The ARV calculation factors in the prices of comparable renovated homes in an area and the value of improvements in those homes. Ultimately, investors want to decide if flipping a particular house will be a profitable endeavor.
This will save you countless time and effort when flipping houses due to the fact this calculation is measured before even purchasing a given home!
Here is a brief video from a hard money lender on what is ARV and how it's calculated:
ARV in real estate is a value of a home after it is renovated to its best condition possible, most commonly used in the house flipping business. It's a forecasted value of a flip project according to the current market conditions.
It's important to note that ARV in real estate is not a fixed number. It's an interpretation or opinion of value based on available market data. Real estate market data is primarily objective information, however the interpretation of that information can change from person to person.
Real estate investors calculate ARV by analyzing the latest real estate sales and market information, then coming up with a realistic conclusion. The purpose of finding the ARV is in order to make the best investment decision possible, whether it's for fixing and flipping a house or just rehabbing to improve the value of the home.
The concept of ARV is not limited to people who fix and flip homes but rather any type of real estate area of business where any modifications of home are needed in order to maximize value, such as in the BRRRR method.
Fixing up, remodeling, and flipping homes has become more desirable given the increased popularity of house flipping shows. These shows might give the idea of it being easy and fun to do, but there is a bigger reality behind it.
That's why understanding all the real estate skills behind it can help you realize your dreams of becoming a successful investor!
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.
Determining the ARV 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 all the exact 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:
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 criteria for your search, including:
Real Estate Comps Criteria: Sold within the last 6 months, matching the minimum bed and bathrooms to your property, square footage within +/- 500 SQFT to your property, within 0.5 to a 1-mile radius, and look for fully remodeled properties.
From our search, we can see there are a fair amount of homes within our search! 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.
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!
How you calculate ARV in real estate is both an art and a science. When finding the after repair value of single-family homes, we must assess both qualitative and quantitative data.
Running comps means studying the numbers as well as observable features of a home and its surrounding neighborhood. Based on what we see in competing properties, we make adjustments to the value of our subject property. Features that warrant adjustments to value include the number of beds and baths, location, condition, special features, and any difference in square footage.
However, here's another way to look at it. The formula is a pretty straightforward one to understand, but it's how you get the two components accurately that might take a little more effort.
To get a clear understanding of what the value of your current property can be, you can hire a real estate appraiser so you have the best idea of the price of the home instead of going off the seller's selling price.
Be sure to choose the right comps when deciding the repair value ARV of your property as well! As we discussed in determining the ARV earlier in this article!
For the estimated repair costs, we would recommend hiring a general contractor! It's best to get several estimates of the renovation cost to ensure you are getting the best deal possible from the original bid price they offered.
Also, make sure you are renovating in the same style and quality of the comps since they are an indication of what people are willing to purchase.
Then after your repairs, you can call that same real estate appraiser from earlier and get them to give you an accurate quote on what the house is actually worth to the market.
If you need more help calculating the ARV down to the dollar, we recommend downloading this ARV Calculator App from HarrisHomes! This is a great way to keep everything you're trying to calculate in one place.
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.
ARV can save you money by helping you understand the subject properties' highest and best use and what is needed before you commit to the purchase. This will help create a solid plan of action instead of going into a project with nothing at all.
Primarily, knowing the ARV will protect you by preventing you from overpaying on any given property. When you know the ARV and the total cost of repairs, you can then use a deal analyzer of the MAO formula to figure out the most you can pay for the property.
Knowing how to calculate ARV allows you to let the numbers talk when making any investment decisions. This is key when flipping houses and doing profitable real estate deals. Instead of making decisions based on emotion that could lead to a negative outcome, let the numbers decide for you.
Successfully dialing in your ARV is almost like a cheat sheet that you can use on a test, so there is no reason why you shouldn't use this valuation method!
On the flip side, when you have a home with no comps it's difficult to determine the ARV with certainty. Without a fact-based analysis of the ARV, you are just gambling. This can result in you failing to sell the house at all or selling the house to a lowball offer.
Both of those situations can result in you losing a large amount of money. That's why taking the time to calculate ARV is both a lifesaver and a necessity when flipping homes. You want to mitigate risk while maximizing profitability.
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.
Real Estate Skills Tip: Kitchens and Baths Sell Houses! Spend Your $$$ Here!
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 for 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.
Real Estate Skills Tip: Look for houses with a price per square foot ($/sf) lower than the market's average.
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!
"Don't wait to buy real estate. Buy real estate and wait."
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.
Practice how to find the ARV of a property and you'll eventually become a master in your market!
Overall, finding the ARV of a property is a skill to continually practice and work on as you become a successful real estate investor. Flipping houses takes a lot of work and if done incorrectly can result in digging yourself in a hole that would be too deep to get out of.
The business of house flipping has become more popular and will continue to grow. That's why working on this valuable skill, in particular, will just increase your chances of taking advantage of money-making opportunities when they come up.
Don't let simple miscalculations and misunderstandings of the market lead you down a path of misery when flipping homes! We hope this Ultimate Guide has provided you with the education to find the ARV with confidence so that you will find your own success in this rewarding business.
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