A Step-by-Step Explanation on How to Calculate ARV

ARV stands for After Repair Value in real estate. It’s a prediction of how much a home will be worth after renovations are done. A fix and flip real estate investor’s primary purpose is to enhance the property’s ARV in order to maximize profit when it is sold.

You must analyze the comps in order to compute a property’s after-repair worth. The term “comparable property” refers to residences that are quite similar in square footage and features to the investment property you’re evaluating. Real estate comparisons must be as close as possible to the investment property you wish to renovate in order to serve as a good property value benchmark.

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When calculating ARV, the primary goal is to determine exactly how much value the modifications will contribute to the property’s arv. Each comparable property that you find is a good starting point for calculating the home’s market worth. Using comps allows you to calculate whether the repair costs will increase the home’s worth and to predict how much profit you may make when house flipping.

How to Calculate ARV: A Step-by-Step Guide

Step 1: Determine the market value of your home as-is.
To begin, you must first determine the present value of your property, commonly known as the “as-is value.” This is something that a professional real estate appraiser can assist you with.

Assume you’ve discovered a 2,000-square-foot property in need of some work that’s worth $250,000 as-is, or $125 per square foot. That should be done before you begin your project.

Step 2: Calculate the cost of the renovations you want to do.

You don’t know the value of the repairs you’ll make to your home at this time, but you may estimate how much the project will cost. These expenses could include:

Materials

Contractors and subcontractors are two types of people that work on construction projects.

Utilities and insurance are among the property’s operating costs.

Taxes on real estate

Closing costs and other expenditures associated with purchasing and ultimately selling a home

You want the difference between the as-is worth of your property and its ARV to be more than the cost of the improvement.

Step 3: Look for homes that are similar to yours.
Three to five comparable properties (“comps”) should be identified. A variety of things influence comparability.

Here are a few common elements that influence your ability to locate good comps:

1. Location: Your comps should be in the same neighborhood as your property, or within one mile of it.
2. Comps should be as close to the same age as your property as possible, but not more than ten years older or younger. They should be comparable in terms of land size, square footage, number of stories, and rooms.
3. Bathrooms and bedrooms: Comps should not have nearly as many bathrooms and bedrooms as your home.
4. Date of sale: Comps must have sold within the last six months, especially within the last three to four months. Real estate prices are subject to rapid fluctuations.

Please keep in mind that these are the bare minimums for evaluating comps. You’ll want to examine as many characteristics as possible, such as parking, HVAC system, and luxuries like decks, sheds, and swimming pools.

After you’ve located some comps, create a chart that compares all of the features side by side. The sales prices can provide you with an upper and lower ARV range. Here’s an example of only a few of each comp’s features:

Step 4: Determine the ARV (example)

It’s time to do some math using the chart that shows all of your comparisons and their sale prices.

The Comparable homes’ average price per square foot using the chart.

The comps mentioned above have an average price per square foot of $188

Multiply your property’s square footage by the average price per square foot of the comps.

Your home has a total area of 2,000 square feet. You’ll get $376,000 if you multiply that by the number you just calculated. This is a significant increase over the property’s current worth of $250,000.

When qualifying for hard money loans, why is ARV important?

The ARV of a property is frequently used by hard money lenders to determine how much of a loan they’re willing to make.

A hard money lender may make loans that are “up to 70% ARV.” 70% of the ARV for the hypothetical project above is $263,200.

It’s worth noting that the ARV criteria is ultimately utilized to determine the property’s estimated value. In other words, while it is not a perfect predictor of a house’s future worth, it is accurate enough for real estate flippers to anticipate how much profit they can earn during the transaction.

At the closing table…

Several factors influence real estate pricing, including supply and demand, location, condition, and property features and amenities. Comparable properties on the MLS are an accepted approach for calculating fair and competitive list prices because these values might be relative and ever-changing. Buyers can even utilize comparable properties to help them figure out how much to offer for a home. Regardless of which side of a transaction they are on, real estate comps are a great resource for real estate professionals.