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The after repair value or ARV, as the name suggests, is the future value of the property after it’s been repaired.
Keep in mind that it’s not a property’s existing value when purchased but rather the estimated value of the property once remodeling is done.
ARV is common among fix and flip investors who buy, renovate, and sell properties within a certain time frame.
The after repair value of any property includes both its original price and the price of its improvements. It is used to gauge the future price of the property once remodeled.
As a fix and flip investor, you should know the ARV as it helps determine if there is enough margin on flipping a house.
ARV can be affected by many factors. However, the two main elements of ARV of any property are purchase price and the value of renovations. Thus, we get the formula given below:
ARV = (Property’s Purchase Price) + (Value of Renovations)
But calculating these variables can be a little challenging. While the purchase price for the current value is always taken, buying right at a deep discount is needed. You need to make sure that you will end up with a sound profit. You can make profits during the fixing stage. However, risks can’t be overlooked. For example, a property requiring cosmetic touch-ups on the surface might require an extensive rehab job.
To calculate the ARV of real estate, a property appraiser will check the property to figure out its existing value, and then the value after it is remodeled, based on the suggested repairs. The appraiser will consider the suggested repairs such as adding square footage, adding a kitchen, or if walls will be renovated or remodeled the entire home. They will then find other houses in the neighborhood that are comparable to the property after the planned repairs and improvements are made. The property’s ARV will be then determined based on those similar properties.
The 70% thumb rule states that an investor should spend no more than 70% of the ARV of a property minus estimated repair costs. In other words, they should make the deal so that they can make a 30% ROI on that flipped project.
So the ARV formula will go like this
(ARV x 0.70) – Estimated Repairs = Maximum Purchase Target
For example, the ARV of a property is $300,000 while the estimated cost of repairs is $ 50,000.
To find out the best maximum price for that property, use the 70% of ARV rule, as follows
($300,000 x 0.70) – $30,000 = $180,000
As stated above, with the given expected ARV and remodeling expenses, the ideal bid price would be $180,000. If you spend more than this amount, you might end up with a loss. If holding costs goes higher than you expect, you’ll want a buffer to have profits. That’s why the thumb rule of 70% ARV is important.
While ARV of a distressed property helps you determine the profitability of a project, it has its share of demerits. Here are some advantages and disadvantages of using ARV to figure out a property’s sale and return.
ARV helps you determine the value of any distressed property once it is remodeled. However, it requires you to fetch proper data and diligence to calculate the ARV of a property. Profit can be made if you make the right deal keeping the home renovations in mind that your customer wants. To maximize the profit of your fix-up, shop around for materials to get them at discounts. Also, know your contractors and make sure they deliver quality work within deadlines and the budget as well.