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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About After Repair Value (ARV)
If you are looking to buy an investment property or planning to flip one, as an investor it is important that you anticipate the profit that you would be making after you flip the property.
To know your profit margins you might need to anticipate the price of the property in the future considering the variables such as housing market trends, comparables, etc.
One such important variable to consider is after repair value of the property as many investors purchase fixer-uppers to make more profit. In this post, we will understand what is ARV in detail.
What Is ARV In Real Estate?
If you are planning to flip a fixer-upper property, you might have heard about the term ARV.
However, what does ARV mean in real estate? After Repair Value, is the estimated value of the property after the renovations are completed and not in its current condition.
Real estate investors often use after-repair value as a way to assess the value of a home in need of repair, including how much it can be bought and resold after repair.
Repairs or renovations can range from installing new appliances in the home, applying new interior or exterior paint, replacing the roof, etc.
Since the fixer-uppers are not in the best condition, the home buyers and investors will not want to buy them at the market value if they plan on making a profit.
These investors or home flippers purchase the price at a below-market price and use after repair value to anticipate the profits that can make by selling the property once the renovation is complete.
This value can be used to get a loan for the cost of “flipping” the property. Some lenders offer mortgages or loans for home improvement, with the maximum loan amount being around 65% of the after-repair value.
Getting after-repair value is also good for homeowners who are not planning to flip the property as it would help you to anticipate how much your renovations would add to your home value.
What Is The Formula To Calculate ARV?
To calculate the more accurate profit that you would be able to make by flipping a house using the after repair value, there are multiple steps you need to follow.
Your intention in calculating the ARV is to know how much profit you can make by selling the home after the renovations are complete.
Calculating the after repair value is fairly simple.
After repair value = properties current value + value of the renovation
However, before you calculate this you might want to derive the property’s estimated current value and the estimated renovation cost.
Step 1: Derive Property’s Estimated Current Value
You can calculate a home’s current value by comparing five or six properties, called comps.
These are homes that are similar in size or shape in the same neighborhood as the property that you are planning to purchase.
Usually, comps that were sold in the last 90 to 120 days are enough for you to compare and understand the performance of the housing market in the area without going too far back in time.
To find suitable comps, you can search on online portals such as HAR or Zillow, or you can get them from the local tax assessor’s office.
To get the estimate of your property’s current estimated value, take the average sales price of the comps that you found from the sources.
For example, if you find five properties that were sold for $240,000, $250,000, $235,000, $260,000, and $265,000, the average price is $250,000.
If you want to get a more accurate property value, you can calculate the average price per square foot of the comps and apply that metric to your property.
For example, let’s say the area of all your comps added together is about 6,000 square feet, the price of all these comps is $1.25 million.
$1.25 million/6,000 square feet = $208.33 per square foot
If your property in question is 1,200 square feet, you can estimate your property’s current value at $249,996.
Step 2: Derive Estimated Renovation Cost / Value.
Next, you’ll want to consider the estimated value of the home renovation. You should start by considering the cost of these repairs, but remember: the cost of repairs is not necessarily the value of these improvements to the buyer.
Contact multiple contractors and ask them to provide a written estimate of the cost of the work.
Be sure to get a detailed list of any repairs that include both labor and the cost of materials.
Compare the price with the amount you think buyers will pay for the home with these improvements.
Comparing comparables that have these repairs with ones that don’t would help you find the difference in pricing and value of those repairs.
Step 3: Calculate the ARV
With the formula mentioned above, consider the same example mentioned above where your estimated property value is $250,000 and the cost of repairs comes to $55,000.
Your After Repair Value = properties current value + value of renovation = 250000 + 55000 = $305,000
So the after-repair value for your property is $305,000
What Is The 70% Rule?
Now that we know the after-repair value let’s see the way to identify if the property is worth buying.
It is wholly based on the price that you are buying the property for. One way to determine whether the property is worth buying is to use the 70% rule.
The 70% rule states that the highest value you can pay for a property is 70% of the ARV minus the cost of renovations. (After Repair Value x 0.7) – Renovation Cost = Gross Purchase Price
Assume the after-repair value of your property is $305,000 and the cost of repairing is $55,000.
($305,000 x 0.7) – $55,000 = maximum purchase price
$213,500 – $55,000 = $158,500
According to the 70% rule, you cannot pay more than $158,500 to acquire your property.
Remember that this is just an estimate, and you might have to negotiate diligently for the seller to accept your offer.
Conclusion
After-repair value is one of the best tools for real estate investors and homeowners that are looking to sell their property with a good profit margin.
However, there are some drawbacks that you might want to consider as these values are just estimates and the appraiser might come up with different property values.
Make sure that you do a thorough inspection of the property before investing as unseen repairs may add to the cost of renovation thus reducing the profit margin.
Also, make sure that you have a good idea about the housing market trend in the area so that your property value is as close as possible to your anticipation.
