Whether you’re a real estate investor who specializes in fix and flip properties or one who prefers to buy, fix, and then rent properties, you should be able to determine the after repaired value, or ARV, yourself of any property you buy. Many investors find it difficult to calculate this formula themselves and rely on others to do it for them, which can lead to serious trouble later on. You can check your numbers with someone else, but you are the only person you can truly trust with your money. Below is everything you need to know about determining the after repaired value of a home.
What Is After Repaired Value?
In short, the after repaired value (ARV) is what your house will be worth once all the repairs are complete. When you buy a property that needs obvious work, the bank looks at two numbers: the purchase price and the ARV. Depending on the work needed, if the purchase price isn’t low enough, or the ARV isn’t high enough, the lender is unlikely to provide financing.
Why Is ARV Important In Real Estate Investing?
The ARV is one of the most important factors in any real estate investing transaction. When it comes to fixing and flipping houses, the profit happens when the house sells. In order for you to know if a property is worth it or not, you have to know what it will be worth once you’re done making all the repairs. Factoring the purchase price, the cost of repairs, and the potential selling price has to be as exact as possible. Any error in estimation and you could wind up losing money instead of making it. When it comes to buying, fixing, and renting properties, the ARV is just as important. If you buy the property at below market value, you stand to make more money because your payments will be lower and if you ever have to sell, you’ll be in a better position to do so. Banks are also more apt to lend to you if they feel they are getting a good deal.
How To Calculate ARV
The formula for determining the ARV is simple. ARV = Purchase Price + Value of Repairs. Having said that, the calculation of the ARV isn’t so black and white. It’s a three-step process that requires know-how and a bit of hard work. Step 1: Determine the current “as is” value of the property. Step 2: Estimate the repair costs and value of the renovations. Step 3: Check your numbers and compare them with similar properties that are for sale or have sold recently.
To estimate the as is value of a property, you can hire an appraiser. Factors such as location, lot size, and structure type are important when determining the current value of a property.
The next step is to figure out how much the completed repairs will increase the value of the property. Here’s an example. You buy a property for $100,000. It takes $25,000 to fix it up. You plan to resell the property for $150,000 once the repairs are finished. That’s a repair value of $50,000 and a profit of $25,000.
In this step, you must find properties for sale or that have recently sold that are similar to what yours will be once repairs are complete. They must be in the same area, have the same number of bedrooms, bathrooms, etc., be almost the same size, and have sold in the last 6 to 12 months. If your estimated ARV is higher than the value of these comparable properties, it’s a sure sign the property is not a good investment and that you’ll lose money if you proceed with the purchase.
Determining the ARV is important for any real estate investment. Being able to determine it accurately yourself ensures you won’t have any issues with the purchase and subsequent profitability of the property.
- Best In Burlington Team
