There’s nothing wrong with buying a fixer-upper. Investors and savvy homebuyers know so-called “distressed” homes can pay off in the long run, especially with the right repairs. If you plan to invest in a property like this, the best way to estimate the payoff of your investments is with ARV, or “after-repair value.” So, what is ARV in real estate and why does it matter?
What is ARV?
ARV in real estate refers to after-repair value. It is the estimated value of a property after renovations and repairs are complete. It’s useful to anyone who plans to buy a home that needs substantial work, whether that person is a private homebuyer or an investor.
“ARV does matter more to a home flipper, a short-term investor,” said Justin DeCesare, an independent real estate broker in San Diego. “Knowing the ARV will allow you to find the best investment opportunity at the lowest cost, but know what you’ll be able to sell it for.”
It’s important to know a property’s ARV before you lock yourself into a bid. Bidding too close to the ARV can easily cut or even eliminate your return on the investment, especially if repair costs are higher than you expect.
How to calculate ARV
You can calculate ARV yourself if you understand property valuation and have a strong knowledge of the local market.
Step 1: Analyze comparables
The first step to calculating ARV is to look at the selling price of comparables, or “comps.”
“Everything in real estate is based on comparable sales,” said DeCesare. “If you have a [similar] house that sold completely renovated for $250,000, you know that if this house is completely renovated, it will probably sell for $250,000.”
A home needs to be local and similar to the investment in question to be comparable. The most useful comps:
- Have sold within the past 90 to 120 days
- Resemble the investment property in size, room count and original build date
- Are located within a mile of the investment property in a comparable neighborhood
Avoid the mistake of comparing homes that look similar but are located in neighborhoods with very different property values. When in doubt, look at the sale prices of multiple properties in an area.
Also, consider when the property was sold and the market conditions. Sales numbers and prices are often higher in the warmer months, and values can change as prices fluctuate. Choose properties with sales dates as close to one another as possible.
Step 2: Estimate the value of each repair
Comps give you a general idea of a property’s ARV. To get a more precise number, you need to consider the upgrades you plan to make. This will help you prioritize improvements, especially if you’re on a budget.
There are a few ways to do this:
- Compare properties. Find the value of several homes with a specific upgrade and take the average. Then average the values of similar homes without that improvement. Subtract the second number from the first.
- Use a repair-value calculator. There are sites for calculating how much a certain improvement will add to a particular property’s value, based on location and extent of the renovations.
- Look at average repair values. Resources like Remodeling.net calculate these figures at a national, regional and local level. Always go as local as possible.
- Consult with a real estate agent. Someone who buys and sells property in the area can give you a current estimate of what certain improvements are worth.
If you do the calculation yourself, make sure you use local and current statistics. The value of improvements varies significantly, even down to the neighborhood level.
Step 3: Consider repair costs
Although you can determine ARV without the cost of repairs, it helps to understand which repairs will be worth the expense.
For example, Remodeling Magazine calculates that replacing a home’s vinyl siding would increase its value by $11,315, but it will cost $16,576—a 68.3% rate of return. A minor kitchen remodel costs $26,214 but pays off $18,927, returning 72.2%. As the investor, you can choose which renovations to include in your plans and ARV calculations.
Step 4: Add repair values to the current property value
There are several ways to find a home’s current value. Be wary of the home-valuation calculators found on many real estate-listing and mortgage-lending sites. Many are geared toward attracting leads and will give you an estimated value even if they don’t have enough data to be accurate.
Safer options include:
- Using reliable data-based estimators like NeighborWho, which bases its estimates on current and historical information.
- Estimating value based on comps, assuming the comps are similar to the current property without renovations.
- Requesting a customized value estimate from a local appraiser or real estate professional, though this may cost you.
Once you have a reliable property value, add your calculated repair values to find the property’s ARV. Use that number to determine what you’re comfortable offering for the property.
What is the 70% rule in real estate?
Some investment experts will caution you to follow the 70% rule when determining your offer.
The 70% rule recommends investors pay no more than 70% of a property’s ARV minus the cost of repairs.Take a property with an ARV of $250,000 that needs $25,000 in repairs. Under the 70% rule, you would calculate a safe buying price this way:
$250,000 x .70 = $175,000 (70% of ARV)
$175,000 - $25,000 (repair costs) = $150,000 (purchase price)
Investors follow this rule because it establishes a 30% profit margin, assuming the ARV and repair-cost estimates are accurate.
The 70% rule is an important benchmark. It helps investors strategize income and expenses, especially when buying multiple properties. It also helps to protect against fluctuations in repair costs and market value. If you invest too much in a property and prices go down or repair costs rise, you can pay more than you get from a sale.
Like any best practice in real estate, the 70% rule isn’t hard-and-fast. If you’re in a buyer’s market, you may be able to bid less and pocket—or renovate—more. If the market is highly competitive, you might need to bid 75% or higher to get your offer accepted.
But even then, it’s important to consider your bid’s percentage of ARV. Many lenders will only approve mortgages if the borrowed amount is 70% of ARV or less. Some may offer more but consider your potential profit margin. A dip in home values or increased materials costs can easily erase that margin if your buying price is too high.
Do you need a professional assessment to calculate ARV?
While it’s possible to calculate ARV independently, it’s not always the best idea—especially if you’re newer to the real estate-investing world. It’s difficult for less experienced investors to know what repairs will cost or how a certain renovation will affect home costs.
“If you’re a beginner investor, definitely find a real estate agent,” DeCesare said. “Find a local agent who has worked with flippers in the past who knows their needs.”
An agent’s assessment will be more informed and specific to your property. It also helps you to avoid common ARV calculation mistakes, including less-than-accurate current value calculations.
Of course, working with a real estate professional takes time and usually carries a cost. Those costs can add up if you appraise multiple properties. That’s why, according to DeCesare, many investors decide to do their own ARV calculations and even get a broker’s license to save on commissions.
Understanding a property’s ARV can help you make a smarter offer, whether you plan to live in the home or flip it as an investor. Always calculate ARV using reliable resources and data points.