Understanding ARV in Real Estate Investments

Flipping houses can be both creative and lucrative, but understanding key terms is important to be successful. One essential term is ARV, or After-Repair Value. Here’s what you need to know about ARV in real estate investments.

What Is After-Repair Value (ARV) In Real Estate?

ARV stands for “after-repair value” and refers to the value of a property after renovations. It’s a critical metric for real estate investors to gauge the potential profitability of a fixer-upper.

How Does ARV Work For Investment Properties?

ARV helps both buyers and sellers. For buyers, it provides the necessary information to make informed decisions about the scope and value of a project. For sellers, it indicates which repairs could increase the property’s market value.

How To Calculate ARV

Calculating ARV involves several steps:

1. Look At Comparable Properties: Work with a real estate agent to get a comparative market analysis (CMA), comparing the property to similar, recently sold homes in the area.
2. Estimate Renovation Costs And Other Expenses: Get accurate repair estimates from licensed contractors and consider additional expenses such as property taxes, insurance, HOA fees, and utilities.
3. Calculate The ARV: Use the formula:
   ARV=Purchase Price+Value of Repairs\text{ARV} = \text{Purchase Price} + \text{Value of Repairs}ARV=Purchase Price+Value of Repairs
   For example, if a home is worth $250,000 and repairs cost $25,000:
   ARV=$250,000+$25,000=$275,000\text{ARV} = \$250,000 + \$25,000 = \$275,000ARV=$250,000+$25,000=$275,000
   Be prepared for unexpected costs like hidden damage.

What Is The 70% Rule For Investment Properties?

The 70% rule ensures profitability. It states that the purchase price should not exceed 70% of the ARV minus estimated repair costs. For example, if the ARV is $250,000 and repairs are $50,000:

Maximum Offer Price=(250,000×0.70)−50,000=125,000\Maximum Offer Price = (250,000 \times 0.70) – 50,000 = 125,000Maximum Offer Price=(250,000×0.70)−50,000=125,000

Downsides To Using ARV In Real Estate Investing

• ARV Is Only An Estimate: The actual value may differ from the estimated ARV.
• ARV Doesn’t Account For Housing Market Changes: Market conditions can affect property values.
• ARV Doesn’t Provide The Full Picture: Factors like location desirability, schools, crime rates, and transportation can also impact the investment’s success.

Conclusion

Understanding ARV can help you make smarter real estate investments and avoid risky ventures. By calculating ARV, you can assess the potential return on your investment. If you’re ready to buy a home or become a real estate investor, start the mortgage approval process with Simplify Home Loans today. If you have questions about ARV or need assistance, contact one of our mortgage professionals for expert guidance.