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In this article, we will explain:
- What ARV real estate is
- how to calculate ARV real estate
- examples of ARV real estate
- how the "70% Rule" factors into ARV
- the benefits of ARV real estate — and the drawbacks
- and more
If you're ready to learn how you can use ARV real estate to ensure profitability in a future real estate deal, let's get started!
What is ARV?
ARV is the estimate of a property’s value after all repairs and renovations are finished.
By determining the ARV of a property, real estate investors will know the max offer price based on the margin that they need to make and can submit a strategic offer to the seller.
Knowing ARV can also help you adjust the asking price of the property when you have finished the repairs and you are ready to sell the property.
Simply put, ARV real estate takes the guessing out of a real estate investing deal so that you don’t lose money.
How Is ARV Calculated?
ARV real estate is calculated using the following formula:
Purchase Price + Value From Renovations = After Repair Value
In order to determine the value from renovations, many real estate investors use “comps”, or comparable properties in the surrounding areas.
Next, we’ll look at each step in depth.
To calculate ARV real estate, you have to first estimate the current value of that property.
A professional appraisal service can identify any issues that may depreciate the property value. A look at the property on the MLS is another tool to utilize.
It’s also important to carry out a comparable market analysis.
Try looking for comps located close to your property, same size and age of your property. You can also compare your real estate property with others that were sold within a two to four months period so you can see how your property compares in terms of value.
This current value will dictate the purchase price of the property.
Value From Renovations
After estimating the property's current value, the next step in determining ARV real estate is to estimate the value from renovations.
This starts with estimating the repair cost on the property. To make a profit on the property, the total repair cost must not be greater than the value of renovations once complete.
After you have both the purchase price and the value from renovations, you can determine the after repair value.
ARV Real Estate Examples
Let’s take a look at 3 ARV real estate examples to help explain how to use the formula.
ARV Real Estate Example #1: Disrepair in the Suburbs
John lives in a nice neighborhood in the suburbs. There is a house on the next street that has a low asking price of $250,000, but it is in disrepair.
John thinks that the house will make a good fix and flip investment. He estimates the repair cost at $30,000. By using comps of similar homes in the neighborhood, he determines that the ARV will be $350,000.
His bid for the home of $215,000 is accepted, and he pays $30,000 for repairs. When he sells at the ARV of $350, he realizes a profit of $105,000.
$215,000 (price of the property) + $30,000 (cost of repairs) = $245,000
ARV = $350,000
$350,000 - $245,00 = $105,000 in profit
ARV Real Estate Example #2: Passive Income from Rental Property
Rachel wants passive income from a rental property. She finds a desirable two-family house that has been on the market for a while. She uses comps to determine that the ARV will be $750,000.
The estimated repair costs are $25,000. She offers $500,000 and the owner, who is anxious to sell, accepts her offer. Rachel currently rents out the property, but she knows that if she chooses to sell, she will realize a profit of $225,000.
$500,000 (price of the property) + $25,000 (cost of repairs) = $525,000
ARV = $750,000
$750,000 - $525,000 = $225,000 in profit
ARV Real Estate Example #3: Using the BRRRR Method
Sam is a serial investor who uses the BRRRR method of Buy, Rehab, Rent, Refinance, and REPEAT.
He puts down $30,000 (20%) on his first investment property, which he picked up for $150,000 – a great deal. He spent another $20,000 on renovations, bringing his cash out-of-pocket investment to $50,000.
Since the ARV of the investment property is $250,000, Sam stands to make a profit of $80,000 when he sells. He uses the profit to invest in other properties.
$150,000 (price of the property) + $20,000 (cost of repairs) = $170,000
ARV = $250,000
$250,000 - $170,000 = $80,000 in profit
What Is The 70% Rule In Real Estate Investing?
When you're rehabbing a property, taking into account the repairs you make on the property prior buying and reselling it is critical.
This is where the 70% rule comes in. It helps investors determine their maximum offering price.
The 70% rule stipulates that a real estate investor should not pay more than 70% of the after repair value (ARV), minus repair costs.
If a real estate investor invests more than 70%, and there is a change in the market, he or she could either be unable to sell the property, or have to sell it for far less than they originally put into it.
For example, if a property has an after repair value of $300,000 and the estimated repair costs are $50,000, then:
$300,000 x 70% (ARV)
- $ 50,000 (estimated repair cost)
$ 160,000 (maximum offer price)
Benefits of ARV Real Estate
The ARV real estate is an important factor when investing in real estate. The benefits of ARV include the following.
ARV Real Estate enables you to set a price for an offer
ARV real estate plays a significant role in allowing a property owner to set a price for an offer from a real estate investor.
Knowledge of ARV would help the seller provide an estimate for renovating a property before setting the total cost of the property.
ARV Real Estate is essential to helping you get your desired profit
With a proper ARV calculation, a seller can place a price tag for a property and still maintain a profit margin even after considering repairs.
It also assists real estate investors in estimating how much they may gain from going ahead with the deal.
ARV Real Estate reduces risk
Calculating the ARV of a property can help to reduce the risk of losing money when flipping houses as an investor.
A proper ARV calculation will give real estate investors an idea of what to expect.
ARV Real Estate can help you get financing
When you turn to sources for funding your investment property, they will want to know the ARV of the property to determine the amount of the loan.
Risks/Limitations of ARV Real Estate
It’s important to keep in mind that there are limitations to ARV real estate.
Changes in the Market
If housing market conditions suddenly change while a real estate investor is in the middle of a project, the ARV real estate will most likely change too.
The true ARV of a property is what someone else is willing to pay for it, and the price is determined by the market. The real estate investor determining the ARV does not set the price according to his or her determination.
An investor could pull the best comps and have backups to support a value but if no one is willing to purchase the property for that price, the investor will have to drop their price to the market value.
Underestimated Repair Costs
Also, if you underestimated repair costs or chose poor comps, your estimation of a likely sales price could be far different than it should (for example, much more expensive), making it hard to sell the property.
You might estimate the repair costs of obvious deficiencies properly, but in any renovation project you run the risk of unexpected repairs leading to unexpected expenses.
ARV Real Estate for Wholesaling
ARV real estate isn’t just a tool for those looking to fix and flip a house; it’s also an important tool for wholesalers.
As a wholesaler, you buy a property under contract to sell to a real estate investor without carrying out any repairs on the property.
To know how much a buyer is willing to pay for your acquired property, you as the wholesaler must calculate the after repair value of that property.
ARV Real Estate for BRRRR
Buying underpriced homes with a substantial ARV can boost your equity and allow you to access more cash for investment through a cash-out refinance.
Successful real estate investors apply ARV when using the BRRRR investment strategy. The BRRRR strategy is a five-step approach where you buy homes in disrepair, renovate them, generate a steady rental income and refinance.
BRRRR stands for Buy, Rehab, Rent, Refinance, and REPEAT.
When the BRRRR strategy works well, you only spend money on the purchase and rehab of your first property. After that, you use your rental income and cash-out refinancing to acquire more properties and generate more income — and more equity.
The Bottom Line: ARV Real Estate
ARV real estate is a critical calculation all real estate investors should be familiar with.
By knowing the term, you can set yourself up for a profitable real estate deal — and minimize risk.
If you’re looking for additional ways to maximize your profit margins and minimize risk, here are additional real estate tools:
- Learn how to calculate gross rent multiplier to determine the profitability of a rental property
- Use this thorough rehab checklist to renovate a property and increase it’s value
- Discover how to pay less taxes legally on your rental property using these strategies
- Learn what cash on cash return is for real estate investors