ARV (after repaired value) is defined as the estimated future value of a property after it has been renovated rather than its current value.
In other words, ARV is the projected future value of a property that has been fixed and is ready to flip. To determine ARV, appraisers research comparable properties (“comps”) that have sold recently in the same area.
What We’ll Cover
Video: What Is ARV and How Is It Determined?
In this video, Noble Mortgage CEO Darel Daik gives an overview of ARV and how it’s determined.
Darel Daik: Hi, I’m Darel Daik with Noble Mortgage & Investments.
A frequent question we get asked is, “What is the ARV, and how is it determined?”
“ARV” stands for “After Repaired Value.” And determining the ARV comes from our appraiser.
We send an appraiser out to the property to tell us how much that home is going to be worth after you complete the repairs.
So before we do that, we need to hear from you. What type of countertops are you putting in the home? What type of flooring? What type of appliances? What type of light fixtures? The more information you can give us, the better. Are you doing an addition to the home?
So all this information we give to our appraiser. He goes out there and measures the home and looks at the other homes in the area, seeing exactly what they’re selling for that have similar finishes to what you plan on doing to the home.
And the after repaired value is what we use as a lender to determine how much we’re going to lend, and also what enables you to get up to 100% financing.
I’m Darel Daik of Noble Mortgage. Thank you very much.
What Does ARV Mean in Real Estate?
After repair value (ARV) is the difference between a property’s current value and what it will be worth after it is fixed up (so the value after repair).
This is a critical number for fix-and-flip real estate investors. If you’re thinking of flipping a house, calculating the ARV is one of the first, most important steps.
The ARV Formula
The formula for calculating ARV is:
ARV = Current Property Value + Value of Repairs
The current property value is the value of the distressed property in its current condition, without repairs. This is usually the same price you end up paying to buy the property.
The value of repairs reflects the added dollar value that your repairs and renovations add to the property.
Why Does ARV Matter?
The after repaired value of a property is important for investors because it indicates whether a property will be profitable enough after renovation to be worth fixing and flipping.
In fact, investors who purchase a property to fix and flip without first calculating ARV risk losing money and time on the deal.
ARV is also used by lenders (including Noble Mortgage) to determine how much to lend investors when issuing a hard money loan. Depending on the ARV, Noble may offer up to 100% funding for the property.
How Is ARV Determined?
So how is the ARV of a property determined? You need an appraisal of the property, comparable sales, and an accurate estimate of the monetary value that repairs will add to the property.
Get a Current Property Appraisal
To get the most accurate estimate of the current property value, you’ll need to get an appraisal using a licensed third-party appraiser who is familiar with the area.
The appraiser will closely examine the property’s condition, factoring in a variety of factors such as:
- The property’s condition: water damage, cracked walls/ceilings, etc.
- Square footage
- Number of bedrooms & bathrooms
- Curb appeal
An experienced appraiser will often be able to identify traits about the property that untrained individuals wouldn’t have caught.
Look at Comparable Sales (Comps)
The exact same house can sell for a much different price based on where it was built and what surrounds it.
That’s why appraisers also use data from comparable sales (“comps”) that were recently completed nearby to arrive at a more accurate appraisal. This research is usually completed using data published in MLS (Multiple Listing Service) listings.
Using comps of similar size and condition is also important because even a slight difference in square footage or condition can change a property’s value drastically. And because property value can increase or decrease over time, appraisers usually look for sales completed in the last 2 to 4 months.
Property value isn’t based only on the property itself, but everything that’s around it. Even the neighborhood and surrounding amenities (shopping, parks, schools, etc.) can have a major impact on the value of a house or multi-family property.
Estimate Value of Repairs
The cost to repair or renovate a property is not the same as the value added by repairs. If done right, the value of repairs can exceed the cost of completing them. Remodeling’s 2019 cost vs. value report gives a great overview – at the national and regional level – of the ROI different types of renovations can provide.
For example, replacing wood carpet with vinyl or wood flooring is a common renovation that can add substantial value to a property. Replacing old appliances with more energy-efficient ones is another common strategy.
If you lowball the costs of repair (or overestimate the value added by your repairs), the difference ultimately comes out of your profit – so property investors must be thorough, accurate, and realistic when estimating the value of repairs.
What Is the 70 Percent Rule?
Any real estate investor who wants to flip a house should know the 70 percent rule like the back of their hand.
The 70 percent rule holds that an investor should offer to pay no more than 70% of the after repaired value of a property, minus the repair cost.
Example: House with a $200,000 ARV
You’re looking to flip a house with an ARV of $200,000. You estimate that repairs will cost about $30,000 to get it ready to put on the market. Using the 70 percent rule, what is the maximum offer you should give for the house?
Maximum offer = $200,000 (ARV) x 0.7 (70 percent) – $30,000 (repairs)
Maximum offer = $140,000 – $30,000
Maximum offer = $110,000
According to this quick calculation, the most you should pay for the house is $110,000. A savvy negotiator could get away with an even lower offer – but this is a great guideline for the upper limit you should consider offering.
What about the other 30 percent?
The remaining 30 percent in this rule includes any costs (such as holding or closing costs), taxes, or fees that the purchaser must pay on the property; anything left over goes into your pocket. This general formula allows you to quickly come up with a maximum offer price for a house or multi-family property that factors in a profit margin by default.
Your Profit Depends On Accurate ARV and Repair Cost Estimates
For the 70% rule to work, it’s important to accurately estimate the ARV and repair costs for a property you’ve got your eye on. If either of these numbers is off by a large margin, you may walk away from the deal with less profit after it sells.
Exceptions to the Rule
Of course, there are exceptions to every rule, and the 70 percent rule is no different. (It would be more accurate to call it the “70 percent guideline,” but that doesn’t have the same ring to it.)
Homes and properties with a low ARV often do not work well with this rule. Lower ARV usually means a lower profit margin.
It’s necessary to evaluate fix-and-flip projects on a case-by-case basis. A property potentially offering a return of only a few thousand dollars may not be worth the time and risk incurred getting the property ready to sell.
For less expensive properties, it may be a better idea to lower the percentage, thus lowering the maximum amount you should consider paying.
On the other end of the spectrum, more expensive properties frequently require that you increase the percentage to as much as 75 percent.
With rare exceptions, sellers generally aren’t willing to knock one or two hundred thousand off the asking price for a high-end property, even one that’s in disrepair.
It takes some practice, but experienced property investors are able to use the 70 percent rule as a loose guideline for estimating profitability of a fix-and-flip project. The key is understanding that it’s not set in stone.
Questions About ARV? Contact Noble Mortgage Today
With over two decades of private lending experience, Noble Mortgage has seen and heard it all. We specialize in hard money loans – for both residential and commercial projects – but we also offer conventional mortgages, too. With locations in Houston and DFW, Noble can provide guidance for any of your investment projects.
You can contact us online, reach our Houston office by phone at (713) 680-8100, or call us in Dallas at (214) 492-0100.