What is After-Repair-Value (ARV)?
What is After-Repair-Value (ARV)?
- After-Repair-Value is an estimate of a property's value once repairs or renovations have been made.
- The after-repair-value of a property can be calculated by comparing it to recently sold comparable properties in terms of location, age, finishes, size and type of construction.
- ARV calculations are used to determine an investor's potential return on investment for a property, and can also be used by lenders to determine loan amounts.
- The 70% Rule in Real Estate Investing suggests that the maximum bid on a property (in disrepair) should not exceed 70% of the estimated after-repair-value minus the estimated cost of renovation.
After-Repair-Value (ARV) Definition
After-repair-value indicates how much would be the value of a property after renovations or repairs are made. This is an estimate which is often used by real estate flippers and investors who buy fixer-uppers and distressed properties. They will renovate and repair these properties before selling them again.
How After-Repair-Value Is Used
ARV is a way of determining how much a property can be purchased for and how much could it be sold for after repairs. The difference between what you can buy the home for and what you can then sell it for afterward is your tentative profit margin. You’ll need to consider the cost of the renovations as well.
Based on ARV calculations, an investor can decide if a property is worth investing in, since the ROI (return on investment) can then be calculated assuming the property is sold at the after-repair-value.
On the other hand, ARV is also useful to lenders (usually hard cash or private lenders) who loan money for the renovation of distressed properties. The loan value is determined using the ARV and not the present value of the property. The improvements can be cosmetic, such as bathroom or kitchen remodel, structural, such as installing a new roof or repairing structural damage, and can include holding costs, such as utilities, financing costs, and property taxes.
How is After-Repair-Value Calculated?
The after-repair-value of your property can be calculated in three steps:
- Find recently sold comparable properties in terms of location, age, finishes, size and type of construction.
- Calculate the PSF (per square foot) rate of these properties by dividing the sold price by the total area of the property.
- Multiply the PSF rate by the area of your property to get the ARV of your property.
After-Repair Value Calculation Example
For example, a recently renovated house of comparable standard in your neighborhood with an area of 2,000 square feet sold for $600,000.
The PSF rate of this house would be $600,000 ÷ 2000 = $300.
Now assuming that your property is 1,800 square feet in area, your ARV would be 1,800 x $300 = $540,000.
The 70% Rule in Real Estate Investing
Property resellers, investors and flippers often use this formula as a rule of thumb while buying properties to resell. According to the 70% rule in real estate investing, the maximum bid on a property should not exceed 70% of the ARV minus the estimated cost of renovation.
For example, if the estimated ARV of a property is $1,000,000 and the estimated renovation cost is $100,000, then:
Maximum bid = (0.7 x ARV) - Estimated Renovation Cost
= (0.7 x$1,000,000) - $100,000
= $600,000
In this case, you shouldn’t pay more than $600,000 for this property that has an after-repair-value of $1,000,000, due to $100,000 in estimated renovation costs. If you pay more than $600,000 for the property, you might not have a comfortable profit margin.
ARV Considerations
Renovation estimates can be tricky and are subject to overrun if more damage is revealed once the renovations begin. For example, a flipper estimated the cost for a bathroom renovation based only on replacing tiles and bathroom fittings, but when the renovation starts, it is revealed that the plumbing lines need to be replaced as well. This would affect the renovation cost of the property and might leave you with more expenses than you calculated initially and may incur a potential loss. At the same time, expenditure on renovation should take into account the buyer's mindset too. A buyer may not see value in a particular repair or renovation, such as expensive tiles or bathroom fittings, and might not be willing to pay more for the same. Additionally, external variable factors such as the housing market, labour costs and material costs may affect the actual value of the property and can vary throughout the course of the renovation.
Key Takeaways
After-Repair-Value (ARV) is an important concept to understand when investing in real estate. It is the estimated value of a property after repairs and renovations have been completed. Factors such as location and condition of the property all impact the ARV of a property. Knowing how to calculate ARV and using it in real estate investing can be beneficial for investors so that they can make informed decisions about how much they can pay for a property.
Frequently Asked Questions about After-Repair-Value
What is an After-Repair-Value (ARV)?
After-Repair-Value (ARV) is the estimated market value of a property after repairs and renovations have been completed. It is the amount that a real estate investor can expect to receive when they sell the property after making the necessary repairs and improvements.
How can I calculate After-Repair-Value?
To calculate an ARV, you will need to research the current market conditions in the area, compare similar renovated properties that have recently sold, and make an educated estimate of the value of the property after repairs and renovations have been completed.
How can I use ARV in real estate investing?
Knowing the ARV of a property can help real estate investors determine how much they should pay for a property and how much they can expect to make when they sell it. It can also help them decide which repairs and renovations are necessary to maximize their return on investment.