After-repair value (ARV) is an important metric for real estate investments that involve renovations or repairs.
By helping investors estimate the potential value of a property post-renovations, they can better determine whether the property is worth their time and effort.
In this article, we’ll explain what factors influence ARV, how to calculate it, and why it’s so important to your investments.
Start your application with Park Place Finance.What is ARV?
ARV is the estimated value of a property after all renovations, repairs, and upgrades have been completed.
It’s essentially the price an investor expects to sell or refinance a property for once it is in its desired condition.
How is it possible to accurately predict a property’s future value?
Investors calculate ARV using a combination of methods, including evaluating recently sold comparable properties in the area.
Why ARV is so important to real estate investors
ARV helps investors:
- Determine which investments will be profitable
- Guide decisions on whether to fix and flip, fix and hold, etc.
- Secure the best financing options
- Mitigate risks and potential losses
- Establish a realistic post-renovation sales price
- Create a proper exit strategy
Without a solid grasp of a property’s ARV, investors risk overpaying for properties or underestimating the costs of repairs and renovations.
How investors use ARV
ARV is most helpful in real estate investments that require significant improvements, including:
- Fix-and-flip investments: ARV is used to determine the resale price.
- BRRRR strategy (buy, rehab, rent, refinance, repeat): ARV is used to pull equity out of a property after renovation to purchase additional properties.
- Rental properties: If a property needs upgrades before being rented out, investors will use ARV to make sure the property’s future value will result in a profitable investment.
- Distressed properties: Foreclosures or other distressed properties use ARV to determine the property’s post-renovation potential.
What factors influence ARV?
An accurate ARV helps investors make the best decisions about their future investments.
Investors must carefully consider the following factors to make your calculation as precise as possible.
1. Location
Location is extremely important in real estate investing and heavily influences ARV.
Properties in high-demand or up-and-coming locations generally will have a higher ARV than those in less desirable areas.
2. Property condition
Properties needing extensive repairs and renovations will cost more than those that only need minor repairs but should also increase the property’s value.
Think of it this way: The gap between your current value and ARV is smaller with minor repairs and larger with more extensive repairs.
3. Comparable sales (comps)
Comps are properties in the area that have recently sold and share features similar to your property.
They can help set a benchmark for your property’s potential ARV.
4. Local real estate conditions
Is it a buyer’s or seller’s market? Are interest rates high? What is the area’s supply vs. demand?
Local market trends and conditions can influence a property’s ARV.
5. Type of renovations
The type and quality of renovations directly impact ARV.
For example, kitchen and bathroom upgrades usually add value to a property, and the choice of materials can influence how much value you add.
How to calculate ARV
ARV = Current Property Value + Value of Renovations/Repairs
To calculate ARV, investors must follow the following steps to plug in the figures for “current property value” and “value of renovations.”
1. Determine the current property value
First, investors must determine the property’s value in its current “as-is” condition.
To accomplish this, they can:
- Begin researching comparable properties in the same area
- Work with an appraiser and real estate agent to help determine the market value
Once you have this figure, you have your starting point for your ARV calculation.
Some ARV formulas use “Sales Price” instead of “Current Market Value,” but sales price doesn’t always reflect the true market value.
2. Analyze comparable properties
Comps should:
- Be within a few miles of the property you want to purchase
- Have been sold within the past 6-12 months
- Be similar in age, size, style, and condition
If there aren’t any perfect matches, use the best data and adjust the ARV up or down to reflect the differences.
3. Estimate the repair and renovation costs
Create a full list of all repairs and renovations you need to perform to bring the property up to market standards.
Then, get quotes from contractors to get a realistic estimate of the total renovation costs.
Ensure that a contingency budget of at least 10% to 20% of the total renovation costs is included to account for unexpected issues or delays.
4. Calculate the ARV
It’s time to plug in your values and estimate your ARV.
Here’s an example calculation:
- Current property value: $150,000
- Estimated repair/renovation costs: $50,000
ARV = $150,000 + $50,000 = $200,000
5. Double-check the ARV using comparable sales
Once you have your ARV, cross-reference your estimate using the sales prices of similar properties in the area.
Consult with local real estate experts to ensure your calculation is accurate.
Common mistakes when calculating ARV
Miscalculating ARV can hurt your bottom line.
The most common mistakes to avoid when calculating ARV include:
- Underestimating renovation costs
- Overestimating the value from renovations
- Using comps that don’t match your post-renovation property
- Not taking location and local market trends into account
- Forgetting to account for holding costs while you wait for the property to sell
For new investors, successful projects take a village.
Build a local support network to help you check your estimates and ensure your figures are accurate based on local conditions.
Get started with Park Place Finance
Park Place Finance is your trusted hard money lender for your next renovation project.
We offer the following loan options to help investors accomplish their goals with access to fast, reliable financing:
We have funded over $1 billion in loans nationwide—and we hope your project is next!
Get a quick rate quote for your next hard money loan now, or call us at (866) 407-1599.