What is After Repair Value?
What is After Repair Value: How to Calculate + ARV Formula
After Repair Value
The after repair value (ARV) estimates the future value of a distressed property after it’s been repaired. ARV is not a property’s current value when purchased but rather the estimated value of the property once improvements are made. ARV is commonly used by fix and flip investors who purchase, renovate, and sell properties within 1 year.
A property’s after repair value includes both its purchase price and the value of its renovations. It’s used to estimate the future sale price of the property once renovated. It’s important for fix and flip investors to know the ARV of a property because it helps measure whether or not there is enough margin for the flip become profitable.
After Repair Value (ARV) Formula
There are several factors that can affect the calculation of ARV. However, the two main components of after repair value are the property’s purchase price and the value of repairs.
The after repair value (ARV) formula is:
ARV = (Property’s Purchase Price) + (Value of Renovations)
How to Calculate a Property’s ARV
To calculate a property’s ARV, the first step is to determine its current as-is value. The second step is to estimate the repair costs and value of renovations. The third step is to check your numbers and compare them to similar properties for sale or recently sold. This will help in determining the profitability of your fix and flip project.
The following steps will help determine the after repair value (ARV) of a property:
1. Estimate the Current Value of Property
To estimate the as-is value of a property, it is best to have it appraised by a professional appraiser. Another way to find out the value of a property is by looking at listing information found on Zillow. It is essential to gather as much information about the property because it will help you determine its current value.
The following information is important when determining a property’s current value:
- Location (neighborhood, accessibility, proximity to amenities, etc)
- Lot (size, corner or interior, shape, slope, terrain, roads available, etc)
- Structure (size, number of stories, type, style, etc)
2. Estimate Repair Costs & Value of Repairs
After figuring out the property’s current value, the next step is to estimate the repairs needed and the value of those repairs. ARV is the sum of the purchase price and the value of repairs. However, you’ll also need to estimate the cost of these repairs to determine your project’s profitability.
For example, let’s say the property’s purchase price is $100k, the repair cost is $25k, and you expect to sell it for $150,000, the value of repairs is $50k but the cost of repairs is only $25k. This results in an ARV of $150k and a potential profit of $25k.
As you can see, the value of repairs helps determine the property’s ARV while the cost of repairs help calculate the fix and flip project’s profitability.
3. Find Comparable Properties
This is the step where you should check your after repair value numbers by finding comparable properties within the same location. Find comps that you expect your property to look like after the repairs. Ensure that the ARV numbers you calculated are in the same range as the value of the comparable properties you find.
You want to find comps that are priced similarly to your expected ARV. If the value of the comparable properties is lower than your estimated ARV, it’s either a sign that the calculation is wrong or a warning that the project will not make a good investment.
What’s more, if your estimated purchase price plus the cost of repairs is more than the comps, you’ll lose money.
Ideally, the following factors need to be considered when finding comparable properties:
- Must be within the same location
- Properties that are sold for the past 6 to 12 months
- Properties with almost the same size
- With the same number of bedrooms, bathrooms, etc.