ARV meaning can vary based on real estate professionals but generally speaking after repair value is what your home would be worth if it were fixed up and put back on the market. It’s important to remember that ARV doesn’t take into account things like realtor fees, closing costs, or staging so you may want to add a little extra cushion to get an accurate estimate of what your home could sell for.
If you’re selling a home, what is ARV can help you determine what price to list your house at and what offers you should accept.
How To Calculate ARV?
Figuring out what the ARV of a property should be can be tricky, but there are some methods that can help you get an accurate estimate.
One way to calculate ARV is by using comparable properties. Comparable properties are houses in your area that have been recently sold and that are similar in size, condition, and features to the property you’re considering. You can find this information by looking online, through a real estate agent, or by contacting the assessor’s office in your municipality.
Once you have a list of comparable properties, take a look at what repairs were made to each home and what was sold for post-repair. This will give you an idea of what your home would be worth if you were to make the same repairs.
Another way to calculate ARV is by using a capitalization rate. This method takes into account what the property could rent for post-repair and then multiplies that number by 12 to get an annual return.
Whichever method you choose, it’s important to keep in mind what is ARV can vary depending on what method you use to figure it out. It’s also important to remember that ARV isn’t the same as market value, which takes into account things like realtor fees and closing costs.
Why Do We Need To Know What Is Arv?
Understanding what is ARV in real estate is highly important for your future profits in real estate. Knowing what your home would be worth if it were repaired and what price to start your listing at is important because that number can help you decide what offers to accept or what repairs are worth making.
If the ARV of a home isn’t high enough, there’s not much sense in investing money into costly renovations since they won’t make up for what you’re losing by putting your home up for sale.
ARV is also important because it can help determine what to pay for a home you’re planning on buying. Knowing what the ARV of an investment property might be will give you an idea of whether that house would provide enough income or not after accounting for repairs and renovations.
How to Use ARV?
An investor can use the ARV to assist recommend a price to purchase a property after calculating it. To do so, you’ll need to think about a lot more than the cost of the repairs. Carrying expenses, such as interest, insurance, and taxes, as well as repair expenditures, all go into a successful real estate investment selection.
To undertake initial screening on investment ideas, one method employs the 70 percent rule. The 70 percent rule states that an investor should not invest more than 70% of the ARV in a property. This covers both the purchase price and the repair costs. If a property’s ARV is $225,000 after $30,000 in repairs, the investor should not spend more than $127,500 for it, according to this guideline. That sum is equal to 70% of $225,000, or $157,500, less $30,000 for repairs.
What does ARV have to do with fix-and-flip investments?
The after-repair pricing is utilized not just to make an offer, but also to get funding for the fix-and-flip. There are a number of independent and hard money lenders who specialize in restoration loans, with a maximum loan amount of 65 percent of the ARV. So, if the property’s ARV is $250,000, the lender will only lend up to $162,500.
Understanding the highest loan amount might help you make a better offer. Let’s imagine you’re able to negotiate a purchase price of $110,000 and a maintenance cost of $55,000 in the situation above. This implies that the loan amount falls inside most hard money or private lender lending restrictions, and the investor just has to provide a few thousand dollars to closing.
ARV Tips for Real Estate Investors
The ARV and repair estimates are often right accurate, and on other occasions they are well off the mark. Even if they used the 70 percent rule or ARV formula, you can’t always trust other people’s ARV or estimated repair costs.
After-repair value is a useful tool for real estate investors who need to rapidly estimate a starting offer price or whether or not a property is worth investing in. Just remember that the ARV is only helpful or legitimate if the approach and comparisons used to calculate it are correct.
If you undervalued repair expenses or utilized bad comps to calculate the ARV, your estimate of a potential sales price might be considerably off the mark, leaving you with a home that you overpaid for.
There are a few drawbacks of ARV that you should be informed of before utilizing the formula. Note that ARV is based on estimations. While you can utilize all of the existing market data, there is no assurance that you will be able to accurately anticipate the worth of your modifications. After all, given the time it takes to do the restoration, the real estate market might shift. This might result in more or lower earnings than projected, based on your estimations.
Furthermore, ARV only takes into consideration a specific point in time. It examines the current and projected worth of a property across the time period under consideration. It doesn’t account for changes in the real estate market, as well as changes in renovation expenses or extra damage detected after the fact.
Finally, ARV is a personal experience. The value is estimated based on the estimates, calculations, and assessment of the person doing the estimation, computation, and evaluation. Depending on who you question, you can get a completely different answer. Always keep in mind that ARV is just one calculation, and even a “good” ARV does not ensure a large profit margin. Rather than depending on a single estimate, it’s always better to employ various valuation methods in addition to ARV to get a whole view.
So now you have a great overview of what is ARV in real estate and how to calculate it. Now that you understand the basics, start thinking about if this metric might be important for your real estate investing goals. If so, why not give us a call? If you want to sell your house we can help you get it on the market or buy it directly from you! Contact us now to find out more!