How to Calculate ARV For Your Next Real Estate Project

Intro 

Understanding ARV, or After Repair Value, is essential for real estate investors engaged in investment strategies like wholesaling, fix-and-flip projects, or BRRR (Buy, Rehab, Rent, Refinance) deals. ARV represents the estimated value of a property after it undergoes necessary repairs, renovations, or improvements.

Key Takeaways

In this article we will go over the following:

• Importance of understanding what an ARV is

• How to calculate an ARV

• The 75 % Rule

• Loan-To-ARV Ratio

• The Appraiser's Role

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What Is ARV in Real Estate?

ARV is an abbreviation for After Repair Value. It refers to the estimated value of a property after its repairs, renovations, or improvements have been completed. ARV is often used when an investor wants to ensure a property's financials work for wholesaling, fix and flips or BRRR deals. For more on wholesaling check out the article "5 steps to get started in wholesaling".

How To Calculate ARV in Real Estate

Calculating ARV (After Repair Value) in real estate involves several steps to ensure you are accurate.

Research Comparable Properties (Comps)

Begin by identifying recently sold properties in the same neighborhood or area that are similar to the one you're considering. These "comps" should have comparable features such as size, age, layout, and condition. Personally, I get my comps from a realtor who is a professional in this area. You can also use Zillow or RentCast to help aid you in comps.

Assess Property Condition

Evaluate the current condition of the property you're interested in purchasing. Note any needed repairs, renovations, or improvements to meet the comparable properties' standards .

Estimate Repair Costs

Obtain quotes or estimates from contractors for the repairs and renovations needed to enhance the property. Consider all repairs such as structural repairs, cosmetic upgrades, and any other necessary system replacements (Furnace, Hot Water Tank, etc..).

Determine Potential Value

Adjust the sale prices of the comparable properties to reflect the improvements you plan to make to the subject property. This adjustment should account for the added value the renovations will bring.

Factor in Additional Costs

Consider other expenses associated with the purchase, renovation, and sale of the property, such as closing costs, financing costs, holding costs (property taxes, insurance, utilities), and selling expenses (real estate agent commissions, closing costs for the buyer).

Evaluate Profit Margin

Subtract all costs from the calculated ARV to determine your potential profit margin. Ensure that the projected profit aligns with your investment goals and risk tolerance.

Check out my Resource Page for some of the top software to help you on your Real Estate Journey

What is the 75% Rule?

The 75% ARV (After Repair Value) rule is a guideline used by real estate investors, particularly those involved in fix-and-flip projects and BRRR deals. Some people will use the 70% rule, it is the same rule but with a different percentage. According to this rule, investors should aim to purchase a property for no more than 75% of its estimated ARV, minus the repair costs.

Here's how the 75% ARV rule works:

Calculate ARV

Determine the After Repair Value of the property by estimating its value after necessary repairs, renovations, or improvements have been completed.

Deduct Repair Costs

Subtract the estimated repair costs from the ARV to determine the maximum allowable purchase price.

Apply the 75% Rule

The purchase price should not exceed 75% of the ARV minus the repair costs. This is to make sure you have healthy margins, and you walk away with a profit and all expenses are covered.

The idea behind the 75% ARV rule is to safeguard investors against overpaying for properties. By sticking to this guideline, I have been able to purchase multiple properties and cash out all my initial investments.

What Is A Loan to ARV Ratio?

The Loan-to-ARV (After Repair Value) ratio is a metric in real estate financing, particularly for fix-and-flip, rehab projects, and BRRR deals. This ratio compares the loan amount to the estimated ARV of the property post-renovation.

Mathematically, it's calculated by dividing the loan amount by the ARV and then multiplying by 100% to express it as a percentage.

For instance, if a lender offers a loan of $150,000 for a property with an estimated ARV of $200,000, the Loan-to-ARV ratio would be calculated as (150,000 / 200,000) * 100%, resulting in a 75% ratio.

Lenders often have specific thresholds for Loan-to-ARV ratios, typically ranging from 70% to 80%. Lower ratios indicate less risk for lenders, as there's more equity in the property to secure the loan, while higher ratios imply greater risk due to less equity investment by the borrower. A very typical Loan-to-ARV ratio is 80%.

How do appraisers determine ARV?

Appraisers determine the After Repair Value (ARV) of a property by analyzing recent sales data of comparable properties and adjusting for differences in condition and improvements. They may also estimate repair costs and add them to the current market value of the property. Additionally, they consider market trends and their expertise to provide an accurate estimate of the property's value post-repair.

Outro

I believe mastering the concept of After Repair Value (ARV) is indispensable. Whether you're wholesaling, flipping properties, or executing BRRR deals, understanding ARV empowers you to make informed decisions, mitigate risks, and optimize profitability. By adhering to principles like the 75% rule you can strategically navigate the real estate market with confidence.

Check out my Resource Page for some of the top software to help you on your Real Estate Journey

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