What Is ARV And How Is It Calculated?
Katie Ziraldo4-Minute Read
February 18, 2021
With home renovation television shows on the rise, it’s no surprise that people across the country are rushing to flip their first house. When done properly, real estate investment can be a creative and lucrative process. But if you’re a first-time investor, there are some important terms you will need to understand before taking the leap. The first and arguably most important term is ARV.
ARV stands for “after repair value” and is used to refer to the value of a home following repairs or renovations, rather than its current state. It is calculated by real estate investors to ensure they’re getting the most out of their investments.
ARV is particularly important to consider when trying to flip a house, as it estimates the return on your investment when it comes time to resell the property.
How Does ARV Work In Real Estate?
In the real estate market, ARV benefits both buyers and sellers. It gives potential investors the background information they need to make educated decisions about the scope of the project and the value of the investment. And when trying to sell investment property, sellers should always determine what repairs could be made to the home to increase its value for the buyer.
How To Calculate ARV
To make the most out of a real estate investment, you need to determine the ARV upfront to ensure the project is worth pursuing. But calculating ARV isn’t as simple as plugging numbers into a calculator, as it requires in-depth research into the property, repair costs and housing market in the surrounding area. If you’re considering buying a property, the following steps will help you determine the ARV and lower your investment risk.
1. Look At Comparable Properties
Looking at comparable properties, or comps, is important when determining a home’s ARV because you want your property to have a competitive price. Comparable properties are nearby properties of a similar condition, age, size, build and style that have recently sold. These are used to determine the current value of the home before repairs. To get the most accurate information possible, we recommend working with a real estate agent to get a professional comparative market analysis (CMA).
2. Estimate Renovation Costs And Other Expenses
Calculating and accounting for the costs of repairs on an investment property is crucially important as these costs will drastically affect your ARV. We recommend working with a licensed contractor to estimate your repair costs as well as any applicable financing or holding costs, such as:
- Property taxes
- HOA fees
3. Calculate The ARV
Once you have the above information, the ARV formula itself is quite simple!
ARV = Purchase Price + Value of Repairs
ARV is equal to the price of the subject property plus the estimated cost, or value, of the renovations to be done. For example, if your house is worth $250,000 and the cost of repairs is $25,000, you have an ARV of $275,000.
When renovating, you must also be prepared for unexpected costs due to hidden damage. Although you may only have a handful of planned repairs, it is not uncommon to unearth issues below the surface that need correcting, such as treating for mold and other household ailments. This can significantly change the renovation estimate of your property and potentially increase the ARV of the home.
If you’re planning to flip a property, experts recommend following the 70% rule – a guideline stating no purchase price at the beginning of a project should exceed 70% of the ARV minus the estimated repair costs – to ensure you will make at least a 30% return on your investment.
Maximum Offer Price = 70% of the ARV - Repair Costs
For instance, if we take the same property with an ARV of $275,000, experts suggest a maximum offer price of $167,500 upfront. Although the 70% rule is a standard real estate practice, it’s important to remember some individuals may pay up to 80% of the ARV depending on the housing market.
Understanding ARV and its importance can help you avoid risky real estate investments and make the most of your property. By looking at comparable properties, estimating renovation costs and following the 70% rule, you can be confident in your investment and its potential return.
Looking for ways to increase your home’s value? Read some investment property tips!
Table of Contents
We’re Busting These Five Real Estate Investing Myths
In the world of real estate investing there are a lot of myths floating around. Let’s take a look at five of the biggest myths.
3 Reasons You Should Invest In Multifamily Properties
Depending on your goals, multifamily real estate can offer a lot of benefits to investors, including minimized risk and scalability. Here’s everything you need to know before investing.