Free ARV Calculator: After Repair Value EstimatorJan 30, 2024
Investors must learn how to apply an estimated value to a property after it has undergone necessary repairs and renovations.
Fortunately, Real Estate Skills provides a tool that makes the process a lot easier to digest: an ARV calculator. We’ve developed a free ARV calculator you can use for your after-repair-value estimates.
In this article, we will guide you every step of the way and be sure you have everything needed for calculating ARV including:
- Free After-Repair-Value (ARV) Calculator
- What Is The Meaning Of ARV?
- ARV Calculation Formula
- What Is The 70% Purchase Rule For Real Estate?
- How To Calculate ARV Of A Property (3 Methods)
- 5 Tips For Calculating ARV In Real Estate
- How To Calculate ARV for Wholesaling
- ARV Calculations: Pros and Cons
- Final Thoughts On ARV Calculators
After-Repair-Value (ARV) Calculator
What Is The Meaning Of ARV?
The after-repair-value (ARV) refers to the estimated value of a subject property after it has undergone the appropriate renovations, repairs, and improvements to resemble nearby real estate comps. Simply put, it’s how much investors can expect to sell the home for after they fix it up.
Beneath the surface, however, the ARV real estate metric is used to lay the foundation for an entire deal. When investors can estimate how much they will be able to sell the property for in the future, they can make more informed decisions, reduce risk, and even evaluate profitability in the present.
Undoubtedly, understanding ARV real estate metrics can drastically enhance your ability to analyze deals, mitigate risks, and predict potential profits. Yet, it is just one of the many vital components in the realm of real estate investment.
*If you wish to delve deeper and gain comprehensive knowledge about various strategies, techniques, and tools that can augment your success, don't miss our FREE training on wholesaling and house flipping from the MLS!
ARV Calculation Formula
The after-repair value estimates how much a subject property will be worth once the necessary repairs have restored the home to its desired condition; in other words, it’s how much the investor will be able to sell it for once they have made the appropriate renovations. With that context, the ARV can be broken down into a simple formula:
ARV = Property Value Before Renovations + Value Of Renovations
Suppose the ARV real estate metric is how much the property is estimated to be worth after the necessary repairs are made.
In that case, it’s safe to assume investors can add the original price of the home to the value that the renovations to determine the ARV.
ARV Formula Example
Let’s say, for example, that an investor can buy a subject property for $500,000 (the property's value before renovations). Subsequently, the investor can add another $100,000 in value through specific renovations and fixes. If the upgrades add $100,000 to the original price, the ARV is an estimated $600,000.
Again, the ARV is only an estimate. A property's current value will depend on several macroeconomic and microeconomic indicators that are too numerous to account for. Therefore, investors need to take this particular calculation's ARV with a grain of salt; it’s intended to complement a more comprehensive analysis.
What Is The 70% Purchase Rule For Real Estate?
The 70% purchase rule is a guideline real estate investors follow to determine how much they can spend on a property. Otherwise known as the 70% rule, the 70% purchase rule leaves enough room for worthwhile profit margins.
In doing so, this guideline centers around the aforementioned after-repair value; it explicitly states that investors shouldn't spend more than 70% of the ARV.
How To Use The 70% Rule
To implement the 70% rule, investors must determine the subject property’s after-repair value.
- Gather Comparable Properties In The Area: The best way to accurately calculate the ARV of a subject property is to first look at nearby comparable properties on Zillow or similar homes within proximity that have recently sold.
- Comparable properties reflect the current value of other homes in the same neighborhood, and there’s no reason they can’t accurately portray how much the subject property would be worth
- Estimate Rehab Costs: Next, investors will need to estimate rehab costs that restore the property to its desired condition. Considering material costs, labor costs, and any other expenses associated with the renovations, investors must add how much they intend to invest in the property.
- This can be done by getting general contractors to bid on the project, consulting with an appraiser, and even talking with more experienced investors.
- Use The 70% Rule To Find The Maximum Price For The Property: With a good idea of the ARV real estate metric and how much it will cost to restore the home to its desired condition, investors will multiply the ARV by 0.7 (70%) and subtract the estimated repair costs.
- The resulting value will represent the maximum price an investor should pay for a property, leaving room for an attractive return on investment.
As a guideline, the 70% rule shouldn’t be viewed as an objective truth. The actual purchase price an investor should pay for a subject property will vary based on several factors, including location, market health, supply and demand, risk tolerance, and more.
Due to the volatility and unpredictable nature of the real estate market, the 70% rule should be viewed more as a starting point for analyzing properties. If for nothing else, the 70% rule offers invaluable insight into a deal when combined with a more comparative market analysis.
How To Calculate ARV Of A Property (3 Methods)
There’s more than one way to determine the ARV of a subject property. In addition to the formula above, today’s most popular ARV calculation methods include the following:
- Sales Comparison Approach
- Income Approach
- Cost Approach
Sales Comparison Approach
With the sales comparison approach, real estate investors are tasked with identifying three comparable properties that have recently sold in the same area and have similar amenities. To use real estate comps in an ARV formula, they should be properties that have undergone renovations or are in a similar condition to what the investor envisions for their property.
Once at least three comparable properties have been identified, add their sales prices and divide the answer by three (the number of properties used). The answer will give investors the average sales price of similar properties within proximity to their own. From there, investors can deduce a good ARV for their investment property.
*For added context, the formula will look like his:
ARV = (Comparable Sales Price 1 + Comparable Sales Price 2 + Comparable Sales Price 3) / The Number Of Comps Used
Calculating the ARV with the income approach involves estimating how much income a property can generate and applying a capitalization rate to determine its after-repair value.
To start using the income approach, investors must figure out how much the property will be able to generate in rent after it’s restored to its desired condition. Like the sales comparison approach, the income approach will rely heavily on comparable properties to determine rental rates for the subject property. Investors can better understand how much income the property will generate by comparing it to similar homes in the area.
Of course, no rental property is immune to vacancies, so investors must account for a collection loss rate. To do so, multiply the estimated rental income by the expected vacancy rate. For context, the average vacancy rate in the United States is about 6.4%.
Next, calculate the net operating income (NOI). Subtract the estimated operating expenses (how much it should cost to keep the rental property in operation) from the adjusted potential rental income to calculate the NOI. The NOI will represent how much the property will bring in after deducting the expenses.
Set the adjusted potential rental income and NOI aside and determine a capitalization rate (the expected rate of return on the property expressed as a percentage). Investors can find cap rates by analyzing recent sales of similar income-generating properties.
*Once all of the variables are accounted for, plug them into this formula to calculate the ARV:
ARV = NOI / Cap Rate
The answer to the formula represents the ARV of the property based on its income potential.
The cost approach is easily the most involved. It requires investors to estimate the cost of rebuilding the subject property and adjust for inflation to calculate the ARV real estate metric. It is also important to note that the cost approach is typically reserved for commercial and specialized properties.
While most investors won’t entertain this idea, understanding the cost approach doesn’t hurt. Therefore, here’s a step-by-step guide for calculating a property’s ARV with the cost approach:
- Estimate The Cost Of Rebuilding The Home: Calculate the expected cost to replace the property.
- Account For Depreciation: Estimate how much the property will depreciate over time. Estimate depreciation by analyzing similar properties' age, condition, and market trends.
- Calculate The Cost To Rebuild: Subtract the estimated amount of depreciation from the estimated cost of rebuilding the house. The resulting answer is the cost of rebuilding.
- Estimate How Long The Property Will Remain In Operation: Estimate how long the property will be in operation.
- Apply The Depreciation Rate: Divide the remaining years of operation by the property's economic life to determine the depreciation rate.
- Calculate The Depreciated Costs: Multiply the cost to rebuild by the depreciation rate to calculate the home's value after it has depreciated over its operating life.
- Add Repair Costs: Add the estimated repair costs required to restore the property to its desired condition.
- Adjust For Market Conditions: Account for market conditions that may influence the property’s price, like supply and demand.
5 Tips For Calculating ARV In Real Estate
Calculating a property’s ARV is crucial for investors who want to assess the potential profitability of a deal. Here are some tips to help with ARV calculations:
- Understand Formula Limitations: It is worth repeating; that the ARV is merely an estimate and shouldn’t be relied upon to deliver a precise valuation. Instead, the ARV should be a more comprehensive valuation analysis starting point.
- Use Relative Comps: Comparable homes are the most accurate way to value nearby properties. Knowing how much a similar home has recently sold for will give investors a good idea of how much their subject property is worth. That said, comps only work if they reflect the subject property well. For the most relative comps, use the Multiple Listing Service to look for those that have sold within the last six months, are within the same neighborhood, and have similar square footage.
- Know The Market: The real estate market is constantly in flux, meaning home values always change. Investors who know the market can adjust for trends and make their ARVs more accurate.
- Trust Your Team: Flipping houses is a multi-person job. Investors rely on their teams to get the job done. Therefore, they must trust their entire team, from the real estate agent (or Realtor) to the marketers. There’s no room or time for anything less than full transparency.
- Mind Due Diligence: It is vital to mind due diligence when checking calculations to ensure the accuracy of each input. Mistakes in gathering data or applying adjustments can lead to inaccurate ARV calculations and ruin deals.
How To Calculate ARV for Wholesaling
Calculating the ARV for a wholesale deal relies on the same formulas as a fixer-upper. However, investors calculating the ARV on a wholesale deal are doing it more so for the end buyers and less so for themselves. In reality, wholesalers only want to know the ARV to relay the value to the end buyer.
At the very least, when a wholesaler knows the ARV, they can calculate their fee for connecting the buyer to the seller.
To guide you further, be sure to watch our video tutorial on how to wholesale real estate!
This video is packed with insights, techniques, and real-world scenarios to help you get started or level up your real estate wholesaling journey.
ARV Calculations: Pros and Cons
The ARV real estate metric is an excellent tool for new investors to reference, but it has flaws. As a result, investors must look at the pros and cons of ARV calculations before diving in. Here are some advantages and disadvantages to consider:
ARV Calculation Pros
The advantages of ARV calculations include, but are not limited to:
- Quick Estimates: Calculating the ARV can allow investors to act on a deal sooner rather than later.
- Assess Profitability: With an estimate of how much a finished product can sell for, investors can assess their profitability on a deal. Additionally, lenders will change underwriting to accommodate borrowers who are more likely to turn a profit.
- Informed Decision Making: The ARV serves as the foundation for decision-making, sometimes informing flippers whether they should buy a subject property.
- Improve Marketing & Selling: Wholesalers and rehabbers may use the ARV to market and sell a property, offering a clear value proposition to anyone who inquires.
- Improve Negotiations: The ARV is an excellent tool for negotiating with sellers.
ARV Calculation Cons
The disadvantages of ARV calculations include, but are not limited to:
- Accuracy: The ARV isn’t always the most accurate valuation when you sell or get the property appraised. However, investors must do their best to predict the ARV ahead of time.
- Market Volatility: ARV calculations will fluctuate regularly as market conditions fluctuate.
- Variability: The variables plugged into ARV calculators and formulas are influenced by several external factors and can change immediately.
- Limited Perspective: Relying on the ARV alone will ignore other critical aspects of a property's market value.
Final Thoughts On ARV Calculators
Real estate investors need to know how to use an ARV calculator. The ability to estimate how much a home will be worth once the necessary repairs are made can significantly impact the decision-making and profitability of an impending deal. An ARV calculator allows investors to estimate the potential value of a property after renovations, providing a clear picture of its financial viability.
By understanding how to use an ARV calculator accurately, investors can make informed choices, negotiate effectively, attract buyers, and maximize their returns on real estate investments.
At Real Estate Skills, our team of experts is ready to provide the tools you need to calculate the ARV of an investment property. We're committed to providing the knowledge, resources, and support you require to navigate each valuation step successfully. So avoid common mistakes and maximize your property analysis strategy by leveraging our expertise.