What does ARV stand for?
In real estate, ARV stands for After Repair Value. It is an estimate of what a home will be worth, after renovations have been completed. The underlying goal of a fix and flip investor is to increase the ARV of the property, in order to maximize profit when it is sold.
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To calculate the after repair value of a property, you need to evaluate the comps. Comps stands for comparable properties, meaning houses that are very similar in square footage and features to the investment property that you are assessing.
The primary objective when calculating ARV is to gain an accurate understanding of how much value the renovations will add to the property. Each comp that you identify effectively serves as a reliable reference point for estimating the market value of the home.
Step-by-Step Explanation of How to calculate ARV
- Step 1: Identify 3-5 comparable properties
- Step 2: Calculate the average price per square foot
- Step 3: Multiply the average price per square foot by the square footage of investment property to workout the market value
Example Demonstrating How ARV Is Calculated
For this example, we will be using a property in West Hartfort Connecticut, but the methods can be applied to any area or State in the US.
Step 1: Identify 3 or more comps
Importantly, the properties you select need to be as similar as possible to the investment property that you are analyzing. This checklist from Mark Ferguson can help you pinpoint properties that will act as very good price reference points.
You can source comps from any of the following resources:
- New Silver ARV Calculator
- Popular websites like Zillow, Redfin, Realtor.com, Trulia & PropStream
- Search the area, noting all properties with ‘sold’ signs and then investigating further
- Chatting to a real estate agent
- The local Multiple Listing Service
Step 2: Workout the average price per square foot of the comps
The calculator has located 4 comps in the same area that also have 3 bedrooms and 2 bathrooms. The average $/SQ FOOT is $161 for the comps. Now you can simply multiply this amount by the revised SQ Foot amount of your investment property, to work out the final ARV.
Step 3: Multiply price per square foot by the property's square footage
- Price per sq foot: 161 $/SQ FOOT
- SQ FOOT: 1440
- Property Price: $161 * 1440
- Property Price: $232,046
What is the 70 rule in real estate?
The 70% Rule is a rule of thumb that property flippers can use to determine the maximum purchase price of a fix and flip property, based on the ARV. It effectively builds a 30% profit margin into the deal. Here’s how the 70 percent rule works:
The 70% Rule Formula
Maximum Purchase Price = After Repair Value * 70% – Estimated Repair Costs
It is important to note that in order to use the 70 percent rule, you need to work out the after repair value first. Think of it as a two-step process.
- Step 1: Calculate the ARV of the property using comps (similar properties)
- Step 2: Calculate the maximum purchase price of the property using the 70% rule
70% Rule Example
The following example should help you understand how to calculate the maximum purchase of an investment property, using the 70% rule. Let’s revert back to the West Hartford house with an after repair value (ARV) of $232,046.
- Property Details:
- ARV = $232,046
- Expected Renovation Costs: $31,500
- Maximum price = ARV * 70% – Repair Costs
- Maximum price = $232,046 * 0.7 – $31,500
- Maximum price = $130,932
In the example above, the maximum offer price would be $130,932 based on the expected ARV of $232,046 and expected repair costs of $31,500. It is important to note that the 70% rule uses ARV to workout the current value of the property, from the perspective of a fix and flip investor. The current owner of the property have a different valuation, which means you may need to negotiate in order for them to accept the maximum offer price that you have proposed.
Are there any other important points worth mentioning?
Yes. You need to be aware of holding costs, loan costs, closing costs and administrative fees when analyzing a potential real estate deal. It is surprisingly common for people to ignore these costs when analyzing the potential profit they can make in a fix and flip.
Fortunately, we have a very detailed Deal Analyzer which lists all the most common costs incurred during a typical fix and flip, together with the expected loan repayments. This can help you form a concrete understanding of a deal’s potential profitability.
At this point it should be pretty clear that working out the after repair value of a property is a fundamental skill for fix and flip investors to develop. Using comparable sales of similar properties in close proximity to your investment property represents the gold standard for calculating ARV.
Moreover, it should also be clear that in order to use the 70% rule to calculate a profitable bid price on the property, you need to workout the ARV first. That is why these two tools are so often used together to complete a comparative market analysis of an invesment property.
Frequently Asked Questions:
What does 70 of ARV mean?
70 of ARV means that you shouldn’t pay more than 70% of the after repair value when purchasing a house to fix and flip. Importantly, you also need to deduct the repair costs before settling on the final offer price. The underlying concern of this question is how much you should pay for the property. Based on this, it makes sense to consult the 70 percent rule again:
Max purchase price = After repair value * 70% – Expected Renovation costs
What is a good ARV?
A good ARV will give a property investor the best possible chance of maximizing profit when the property is eventually sold.
To this end, the 70% rule (outlined above) remains an excellent guideline for determining a good ARV. You need to ensure that the resale value not only covers all your costs, but also generates a healthy measure of profit. If you can find a property that is compliant with the 70% rule (or even cheaper), most real estate investors would agree that the after repair value can be classified as ‘good’. It effectively means that you have found a property that will almost certainly provide a positive return on investment.
What is loan to ARV?
Loan to ARV is the maximum loan amount that a hard money lender is willing to offer an investor, relative to the after repair value (ARV) of the property. For instance, if the loan to ARV is 75%, it means:
- If the ARV is $100,000, the lender is willing to offer a loan of $75,000
- If the ARV is 250,000, the lender is willing to offer a loan of $187,500
Most hard money lenders will offer loan to ARV terms ranging from 65% to 90% of the property’s post renovation selling price. To workout the loan to ARV, you simply need to multiply the percentage offered by the hard money lender by the after repair value of the property.
How To Find High ARV Properties
To maximize profit in a fix and flip deal, you need to transform the current value of the property. In most cases, ugly, run down houses actually have the most ‘transformation potential’. Ultimately, you should try to:
- Find ugly properties in good neighborhoods
- Find houses with a price per square foot that is lower than the market average
- Find houses with unique selling points like spectacular views or a large plot size
In addition, you can also use FlipScout by New Silver. FlipScout is basically a search engine for property flippers. It allows you to search for properties using any zip code, it provides a reason for the property being undervalued, and it provides an estimated ROI (return on investment).
Lastly, you can also read more about how to find undervalued properties in this guide.