How to Calculate After Repair Value (ARV)
After Repair Value (ARV) is the value of a property after repairs have been completed and it is ready to sell in the real estate flipping business. It considers the entire cost of repairs as well as the home’s assessed value.
Real estate flippers are individuals or corporations who purchase homes for the purpose of repairing and reselling them. Experienced flippers are familiar with their surroundings and markets. They’re also real estate investors, which means they acquire houses, fix them up, and then resell them for a profit.
Flippers with sufficient house repair and sales experience utilize the ARV to evaluate value. These entrepreneurs frequently hold general contracting and real estate licenses, which enable them to work on and sell a variety of projects.
What Is the After Repair Value (ARV)?
The ARV is more of an educated estimate of a property’s current value than it is a book value. Real estate investors typically have a good understanding of the houses they are buying or fixing, as well as what they might be worth in the future or when repairs are completed.
If repairs are required, the investor calculates the ARV by taking their assessment of the property’s existing value and adding the cost of the repairs (or the expected cost).
How Do You Calculate After Repair Value (ARV)
The ARV formula is not difficult to understand.
ARV = property’s current value + value of renovations
The present worth of the property is the money paid for it by the investor, and the total renovation cost is the value of the renovations done or an estimate.
How the After Repair Value (ARV) Works
It can be difficult to determine the variables for the equation. The current value of a property reflects its current state. To maximize their earnings when selling the home, the investor must be able to pay as little as possible beneath its present value.
The most dangerous component of investing in a home repair is getting a renovation quote. There may be simply visible damage, or there may be much more damage that cannot be seen until additional repairs are completed.
Assume a flipper determined the value of a home based on new siding, carpet, and a new roof. It was discovered that there was mold behind the baseboards after the carpet was removed. They discovered black mold in the walls of every room after further inquiry.
The After Repair Value’s Limitations (ARV)
The ARV is a computation of a single point in time—the property’s value in the current housing market and its level of repair at the time of calculation. This value might fluctuate on a daily basis during a home’s restoration process.
The housing market can swing back and forth, causing comparable home values to rise and fall. The cost of renovations can vary based on the extent of the damage discovered—it could be less or more than expected.
An appraiser may make different assumptions and place a different value on some characteristics of a home than an investor or realtor. Because every lender requires a current appraisal, an investor may lose money if the appraiser determines the property’s value is less than predicted.
The investor’s return is also affected.
Important Points to Remember
- While the After Repair Value (ARV) of a home is straightforward to determine, it is dependent on accurate repair estimates that account for all factors.
- Low-value returns can be seriously harmed by an appraiser. This necessitates a thorough understanding of the local and overall market dynamics.
- When calculating, the investor must be able to account for prospective losses due to unforeseen occurrences.