Fix and flip projects, also known as ‘flipping houses,’ can be highly lucrative. However, you must master one thing: After Repair Value (ARV)—the approximate market value of a property after renovations.
Paying close attention to ARV can offer insight into the potential profit hiding in every distressed property.
Knowing how to calculate ARV also allows you to avoid overpaying, accurately plan renovations, and secure the right financing.
In this article, we’ll show you the ARV house flipping formula and explore how investors can leverage ARV to make smarter, more profitable decisions while reducing risk in the ever-competitive real estate world.
Start your application with Park Place FinanceWhat is ARV in real estate?
The After Repair Value (ARV) estimates a property’s market value after renovations, helping house flippers gauge investment potential and profit.
ARV is calculated by analyzing the current value and projected increase, typically using comparable sales (comps) — properties recently sold in the area with similar size, condition, and location.
The importance of ARV in flipping houses
Without an accurate ARV, investors risk overpaying for a property or underestimating renovation costs.
Determining the purchase price
ARV guides the purchase price of properties intended to be flipped.
Flippers rely on the projected resale value to avoid overpaying and ensure the property will generate enough profit after renovations.
Estimating renovation costs
ARV enables flippers to create a renovation budget that matches the property’s projected resale value, ensuring it sells at a price that covers both purchase and renovation costs while still leaving room for profit.
Securing financing
Many house flippers use hard money loans or other financing options, and lenders determine loan amounts using ARV.
An accurate ARV calculation can help borrowers secure the funding needed for their projects.
Setting an exit strategy
Successful house flipping requires selling the property at a profit.
ARV helps investors set realistic sales price expectations and establish a strategy that aligns with market conditions, such as whether to sell immediately or hold the property for long-term appreciation.
Leveraging ARV for negotiation strategies
ARV is a powerful tool for negotiating the purchase of distressed properties.
Investors can use ARV projections to justify offering a lower price, particularly when dealing with motivated sellers or banks.
By outlining the projected resale value and renovation costs, flippers can explain the need for a lower upfront price, ensuring the deal is financially viable and leaves room for profit after repairs.
The ARV house-flipping formula
To calculate ARV, you must research recent sales of similar properties in the area. This will give you a clear idea of the property’s potential value after renovations.
Step 1: Analyze comparable sales (comps)
Find comparable properties in the same neighborhood that have recently sold.
Look for homes with similar:
- Square footage
- Number of bedrooms and bathrooms
- Lot size
- Age and condition
- Style and construction
Comps should have been sold in the last six months to represent current market conditions accurately.
Step 2: Adjust for differences
Adjust your ARV calculation for any differences between the property and the comps.
For example, if the comp has more bedrooms or a finished basement, you must account for those factors.
Step 3: Factor in renovation costs
After estimating ARV based on comps, calculate renovation costs.
This includes both cosmetic updates and significant repairs. Always budget for unexpected expenses during the renovation process.
Step 4: Use the 70% rule
The 70% rule helps determine the maximum price an investor should pay for a property.
According to this rule, the purchase price should be no more than 70% of the ARV minus renovation costs.
Let’s look at an example if the ARV is $300,000 and renovation costs are $50,000:
- Start with ARV: $300,000
- Multiply ARV by 70%: $300,000 x 0.7 = $210,000
- Subtract the renovation costs: $210,000 – $50,000 = $160,000
Working with appraisers and real estate agents to determine ARV
Investors seeking accurate ARV calculations should work with appraisers and real estate agents. Their local expertise provides reliable comps and valuable insights.
Appraisers offer formal valuations for financing, while agents provide practical market knowledge for buying and selling decisions.
ARV and hard money lending
Flippers frequently rely on hard money loans for fast capital to purchase and renovate properties.
Hard money lenders—focused on speed and flexibility—base their decisions primarily on ARV.
By assessing the loan-to-value (LTV) ratio through ARV, they gauge the property’s potential value and the project’s risk, ensuring they back investments with solid profit potential.
Loan approval based on ARV
Hard money lenders typically lend between 65% and 75% of the ARV.
For example, if the ARV is $400,000, a lender may offer a loan of $260,000 to $300,000. The investor must cover the difference with a down payment or additional financing.
Risk assessment
Lenders use ARV to evaluate a project’s risk. A higher ARV and a solid renovation plan can increase lender confidence, while an overestimated ARV may reduce loan amounts or lead to loan denial.
Loan terms and ARV
Loan terms are often based on ARV. Higher ARV properties with greater profit potential may receive better loan terms, while properties with uncertain ARV may face higher interest rates.
Common mistakes with ARV calculations
ARV is a powerful tool for house flippers, but miscalculations can lead to overestimating profits or risks.
Overestimating renovation value
Flippers sometimes overestimate how much value renovations will add to a property.
Not all home improvements significantly increase value; some may offer little or no return. That’s why it’s important to research and determine which projects are worth investing in.
Ignoring market trends
The real estate market is constantly changing. ARV calculations must factor in current market conditions.
A well-renovated property may not sell for its expected ARV in a declining market, while a hot market may lead to faster-than-expected appreciation.
Using inaccurate comps
Choosing outdated or inaccurate comps can skew ARV calculations. It’s essential to compare the property to recently sold homes similar in size, condition, and location.
Funding flipping projects with Park Place Finance
Whether you’re new to flipping or a seasoned investor, mastering the ARV-flipping connection is essential for profitability.
Park Place Finance’s quick and easy application process enables us to find the best way to get you the cash you need for your fix-and-flip project.
Start your application today, or contact our team of lending professionals at (866) 407-1599.