After-repair value (ARV) is the estimated value of a property after repairs and renovations have been completed. This allows investors to determine the selling price, refurbishment budget and profitability of potential investments. It is used by long-term investors to estimate the long-term rental value of properties and by fix-and-flip investors to buy, renovate and sell properties for profit.
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ARV Formula
Use the following formula when calculating the ARV of a property:
ARV = purchase price of property + value of renovation
How to calculate a property’s ARV
The formula for calculating ARV is simple, but figuring out the components of the formula is not so easy. Here’s what you should do:
Step 1: Estimate the present value of your property
The first step is to determine the current value of the property.website, etc. Jiro and redfin, to help determine the current property value. Realtors also have tools to help determine the current value of your property. Factors that determine property value include:
- position: where the site is
- Many: Size, shape, passable roads, etc.
- structure: scale, number of floors, type, style
- situation: how bad the property is
Step 2: Estimate Repair Costs and Repair Values
The repair estimate process is a two-step process. I need to know how much the repair will cost and how much value the repair will add to her ARV. In other words, if for $25,000 he can add $50,000 to his ARV, the potential profit increases.
Step 3: Find comparable properties
Accurately estimating the potential selling price of a completed project is critical. To do that, we need to obtain comparable prices for other properties sold as well as the project. This will let you know if the project will be profitable.
Again, realtors are a great resource when it comes to comparisons. Keep the following factors in mind when looking for comparable properties:
- Properties must be within the same geographic area
- Property must have been sold within the last 12 months
- The properties should be of similar size and have a similar number of bedrooms, bathrooms, etc.
The comparison does not have to be exactly the same as the property under consideration. The appraiser adds or subtracts the assessed value and compares the two. For example, if a property has an extra bedroom or bathroom, that’s added value. Zillow has great resources About real estate comps. For more information, check out our guide on how to do a comparative market analysis.
Keep in mind that the more unique the commercial building you buy, or the more remote you buy, the more difficult it can be to find an accurate and comparable property. This makes it more difficult to judge project profitability.
70% rule for ARVs
ARV’s 70% rule helps calculate the maximum bid price for a fix-and-flip investment. Bids are limited to 70% of the expected selling price minus repair costs. This allows an investor to expect a 30% return on investment (ROI) if all goes well, and provides a buffer against unexpected repair costs.
The formula for the ARV 70% rule is:
Highest Highest Bid Price = (ARV x 70%) – Estimated Repair Cost
Calculation example of ARV and maximum bid price
Here are two examples of how ARV and max bid are calculated and how fix-and-flip investors use them.
Example 1
The investor will make a profit of $42,000 and the sale price will be equal to the highest bid. They will probably pursue this deal.
Example 2
Investors are not interested in this break-even trade as the potential profit is $0. The sale price of the property must be below the maximum bid of $56,000 for the transaction to go through. At a selling price of $110,000, this makes no sense to investors.
ARV calculator
Advantages of ARVs
ARV calculations are useful for both buyers and sellers of investment property. The advantages of ARV are:
- Determine future profits. By calculating the potential ARV and comparing it to the selling price, an investor can determine whether a potential property will be able to generate sufficient returns after corrections and reversals.
- Set an appropriate selling price. Once the ARV is calculated, the seller can set the appropriate selling price of the distressed property for the investor to purchase.
- Force cost-benefit analysis: By completing the ARV process, investors are forced to make a thorough estimate of repair costs and potential value increases, reducing the likelihood of making erroneous investment decisions.
- Allow investors to set their budget. By estimating the cost and potential increase in value of repairs, investors can budget construction teams to avoid overspending that can squeeze profits.
If you are looking for a fix and flip loan or hard money loan provider, please see our Buyer’s Guide at the link below.
Drawbacks of ARVs
ARV is one of the tools used by fix-and-flip investors, but it is far from perfect. Using ARV has some drawbacks.
- It is impossible to predict the exact amount of repairs. Market data can help accurately estimate the value of repairs, but it is difficult to know exactly how much repairs will affect ARVs. As a result, the selling price after repairs may drop and your profit may decrease.
- Obtaining an accurate ARV is time consuming and expensive. It takes a lot of time to calculate and accurately calculate all repair costs, added value and equivalent property values. And in many cases, you will need the help of a professional such as a real estate agent or a certified appraiser. Hiring a professional will give you a more accurate estimate, but it will cost more.
- It does not consider market fluctuations: The market has been very volatile over the past few years. Although the commercial real estate market is less volatile than the consumer real estate market, it can still fluctuate during the renovation process and the final value of the property may differ from the estimated value.
- Subjective: After all, whether it’s the cost of repairs, the added value of repairs, or comparable property values, they are subjective values. With good data and the professional help of a realtor or certified appraiser, you can make the best possible guess, but in the end it’s not perfect. Therefore, fix-and-flip investors should prepare for the risks associated with potentially inaccurate estimates.
Conclusion
Understanding ARV is important when buying distressed real estate, especially for fix-and-flip investments. This will help you know how much to bid on the project, how much it will cost to repair, what value to add to the project, and what the future selling price will be to make a profit. increase. ARV is an imperfect tool, so it’s important to understand its shortcomings before starting the process. Nonetheless, it helps determine the profitability and costs associated with a fix-and-flip investment.
However, investors should also understand loan-to-cost (LTC) and loan-to-value (LTV) ratios and how they affect potential investment projects. Also, before taking a small business loan to purchase investment property, it is important to understand the requirements the lender has for this type of loan.