In this article, we will explain ARV and how you can use it to ensure profitability in a future real estate deal.
What is ARV?
ARV is the estimate of a property’s value after all repairs and renovations are finished.
Through 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 takes the guessing out of a real estate investing deal so that you don’t lose money.
How Is ARV Calculated?
ARV 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.
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)
Limitations of ARV
It’s important to keep in mind that there are limitations to the ARV of a property.
If housing market conditions suddenly change while a real estate investor is in the middle of a project, the ARV will most likely change too.
Also, if you underestimated repair costs or chose poor comps, the 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.
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 back ups 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.
After Repair Value
After repair value is a critical calculation all real estate investors should be familiar with.
By knowing the term, and more education, you can set yourself up for a profitable real estate deal and minimize risk.