The ARV, or After Repair Value, is perhaps the most important calculation for fix & flip success. This is the step where you can determine if there’s profit on your deal. What does estimated ARV mean?
You might’ve gotten into fix & flip real estate investing because you love a challenge; you just didn’t realize there’d be so much math behind it! The key to successful real estate investing is knowing your numbers, and one of the most critical numbers is the estimated ARV. What does estimated ARV mean, and how can you calculate it?
ARV is the acronym for After Repair Value and is the calculation that determines how much a property can sell for once upgrades and repairs have been made. To calculate ARV, you’ll pull recently sold values for comparable properties in the area. Once you have the ARV, you’ll be able to determine both how much your offer should be to buy and what you can expect to receive when you’re ready to sell.
If your head feels like it’s spinning, you’re not alone. ARV can seem complicated, especially when you weren’t expecting to crunch numbers. So I’ve broken down the different components that go into finding the estimated ARV and a few tips for ensuring your calculations are accurate below. Let’s dive in.
What does estimated arv mean?
ARV stands for After Repair Value. This is the estimate of how much a property will be worth once repairs and upgrades are made. Real estate investors will use this number to determine what the profit margin will look like between selling the home “as-is” versus how much it will sell for if a rehab is done.
Calculating ARV is essential for real estate investing because it covers the entire lifecycle of a fix & flip. ARV affects how much you should offer to buy a home and how much you can expect to receive in profits after selling. If you don’t take the time to calculate ARV, you’re likely to waste way more time, effort, and money than necessary.
Is ARV Just for Fix & Flips?
ARV is still helpful if you’re thinking about real estate investing but aren’t interested in the fix & flip method. If you’re a wholesaler, ARV can help determine how quickly you’ll be able to unload the contract onto a new buyer. Landlords can use ARV to see whether there’s a potential to increase the amount of money they can receive in rent from their tenants, too.
ARV vs. ARV: What’s the Difference?
It can be confusing trying to decipher real estate jargon, and ARV can get particularly confusing since it’s used for multiple things.
There’s also another ARV out there that stands for Annual Rental Value. This solely relates to rental properties, where After Repair Value is used for properties that are for sale. Annual Rental Value might sound like it does similar things, but it’s actually used to understand the costs of a rental property, whereas After Repair Value looks at profit.
How Do You Determine the ARV of a Property?
Look for Comps
Comps, or comparables, are houses on the market that are similar to your potential investment property. Finding comps is critical for the success of your business, so don’t skimp on this. We have real estate investment software that can help you find comps easily, so check it out if you aren’t sure how to get started.
My rule of thumb is to find three comp properties that have recently sold and three comps currently on the market. If you’re having trouble finding comps, I’d recommend expanding your search to include houses that have sold within one year and are no further than one mile away. Check out this guide for how to find comps for your home to get a more thorough run down.
The video at the top of this article is also a fantastic guide where I walk through exactly how to pull comps.
How to Use the ARV with the 70% Rule to Calculate Your Offer
When you have the ARV, you can calculate what your offer should be when reaching out to the seller. The 70% Rule works like this:
70% of the ARV – the cost to repair = your maximum offer
If you’ve found a potential property that you’ve determined has an ARV of $300,000 and needs $55,000 in repairs, your calculation would look like this:
- $300,000/0.7 = $210,000
- $210,000 – $55,000 = $155,000
- So your maximum offer should be no higher than $155,000.
Is the 70% Rule Useful?
The 70% Rule is pretty standard in real estate investing, but I like to caution our clients against leaning on it too heavily.
The good side to using it is that you can find an offer price that’s both reasonable to the seller and profitable to you as the investor.
The bad side to using it lies in that finicky repair costs number. Like I said above, calculating costs involves a lot of nuances and shouldn’t be glossed over, so I’d recommend overestimating that number until you become more experienced with fix & flips. I usually pad my estimated costs with at least another $5,000.
The After Repair Value is a critical piece of your real estate business because it tells you so much about a home’s potential. Don’t be intimidated by the math; take it slowly and ensure that you have good data to help with the calculations. If you’ve got questions or need something clarified, leave a comment and let us know!