What is After Repair Value (ARV)?
How to Calculate After Repair Value
Whether you’re new to real estate or a seasoned investor, it’s likely that you have heard of the term ARV. After Repair Value, otherwise known as ARV, is a key metric utilized by real estate investors to determine the future value of a prospective property after all necessary renovations have been completed. When used correctly, investors can accurately predict the future value of a home and use their calculations to qualify for purchase and rehab loans. ARV is an extremely valuable metric and can even be used by homeowners to maximize the value of their home and make cost effective repairs.
What is After Repair Value (ARV)?
ARV or After Repair Value is a calculation that estimates the value of a home after completed renovations. This metric is especially useful to home flippers interested in gauging the profitability of planned repairs. Typical renovations that bring a home’s value to its ARV include updated kitchen appliances, a new roof, foundational repairs, and more.
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When searching for homes to purchase, house flippers look for homes in worse conditions, but with high prospective ARVs. This allows them to easily profit on deals after making necessary repairs to their properties.
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Certain lenders provide loans with financing terms based off of the ARV of a property. For example, a house flipper can purchase a property for $50,000 that also needs $25,000 in repairs to bring it to its ARV of $100,000. An experienced borrower could receive a loan amount equal to 75% of the ARV, enabling him to cover both the purchase and rehab with their $75,000 in financing. Loans like these are typically marketed to house flippers by hard money lenders.
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How to Calculate ARV
There are numerous ways investors and homeowners alike can calculate after repair value. The most basic calculation would be to add the value of needed repairs to the current value of a property. However, this calculation won’t be as accurate as some other methods investors use.
Evaluating comparable homes, or “comps”, is one of the best ways to get an accurate read on your home’s ARV. Comps are essentially comparable properties located near your home that have recently sold. In order for a home to qualify as a comp, it must be located in the same neighborhood as your own, have a similar number of bedrooms and bathrooms, and have a similar square footage. By gaining access to the MLS or utilizing a program like Propstream, you can the use sale price and square footage of 3 to 5 comps to calculate an average price per square foot (ppsf). From there, you can generate a more accurate ARV by multiplying the average ppsf times the square footage of your home.
Limitations of ARV
While ARV is generally a strong metric to use before deciding whether or not to flip a property, it comes with certain limitations. ARVs have a tendency to fluctuate over time and are most accurate when calculated with recent data. Certain properties may not be in proximity to recent sale comps and this can skew the after repair value of a prospective home.
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The direction of the overarching real estate market can have a significant impact on ARV as well. If the comps used to calculate ARV decrease in value, this can decrease the value of your renovations too. Moreover, using comps that aren’t the best match to your home can cause you to incorrectly estimate your ARV.
Bottom Line
ARV is a useful calculation that both homeowners and real estate investors can use to estimate the future value of their property. Even though it has its fair share of limitations, when used correctly, after repair value allows investors to ensure that their renovations will generate profit.