How to Calculate ARV in Real Estate

Different real estate strategies require that you know how to calculate ARV or after-repair value. So that’s what we’ll cover in this article.

The ARV is a popular concept among property investors. Yet, beginners are frequently confused about its meaning, calculation, and use.

Table of Contents

1. What Is ARV in Real Estate?
2. After Repair Value (ARV) Formula
3. When Do You Need to Know the ARV of a Property?
4. How to Calculate ARV
5. You Should Also Know About the 70% Rule

In this blog, we will discuss everything you need to know about the after-repair value in real estate. By the end, you’ll learn how to find the ARV of a house, when to utilize this metric, and why it is so important for investors. We’ll also show you how the Mashvisor platform can help you evaluate the future value of the property you consider in an easy and straightforward way.

What Is ARV in Real Estate?

In the world of real estate investing, ARV stands for After-Repair Value. It is the estimated potential value of a property after significant repair work has been done on it. In most cases, it refers to a distressed property’s value after it is fully renovated. Related home renovations may include anything from cosmetic work and repainting all the way to entire remodeling with comprehensive rehab repairs.

While the ARV is primarily used by fix-and-flip real estate investors, other situations require it to make smart property investments. We’ll cover the specific uses of this measure in a bit. Meanwhile, it’s good to know that the ARV can be of help when you need to know how much you can increase a property’s price after fixing it.

After Repair Value (ARV) Formula

To know how to find the ARV of a property, you need to know the ARV real estate formula.

The after-repair value formula is: 

ARV = Property’s Current Value + Value of Renovations

There are two main components to the ARV formula.

The first component is the investment property’s current value – this is the value of the property in its present condition. It’s usually the same as the property’s sale price, i.e., the price you pay to acquire the property before you begin working on it. However, this might be different from the listing price if the owner is trying to sell for more than the property’s worth.

The second component is the value of renovations – this is the value added to the investment property after its repairs and upgrades. This is where the bulk of the work in calculating the ARV comes from. It depends entirely on the amount and type of renovations you plan to do on the home and can be anything from a few thousand dollars to doubling or even tripling its sale price.

How to Calculate ARV

There are three main steps in how to find ARV, regardless of the strategy you go for as a real estate investor.

Here are the three steps in calculating the ARV of an investment property:

Step 1: Estimate the Property’s Current Value

The first step is to estimate the subject property’s current value, which is also known as the as-is value in real estate. We highly recommend you hire a professional appraiser to do this. Real estate appraisers are experts at estimating the value of residential properties. They know very well what to look for in a property and can identify any defects or issues that may affect its value.

An appraiser will, therefore, provide you with a highly accurate estimate of your investment property’s current value. It might be different from the listed sale price, and in case the current market value of the house for sale is above the listing price, you have to negotiate with the property seller to get a better price. After all, overpaying for a property is a bad investment move.

Step 2: Estimate the Value of Renovations 

The second step in calculating ARV is to estimate the value of renovations. But first, you need to assess the renovation costs or how much money you’ll spend on renovations. Doing this will help you determine the project’s profitability, as the costs must be less than the value of renovations in order to make a profit. 

It’s crucial that you estimate the costs accurately so you can get the most value out of your renovation works.

Here are some tips that can help you determine the repair costs and the value of renovations:

• Get estimates from at least three contractors. Ask them to prepare an itemized list of all necessary repairs and associated expenses. This will allow you to compare their quotes to find the best one. Make sure you hire contractors that offer reasonable rates and are also qualified and experienced so you get quality work and services. 
• Get the material estimates right. We recommend using a building materials calculator to calculate how much the materials for the home repair job cost. Check local and online home stores and look for materials at acceptable prices. Look for discounts at reputable stores. 
• Base your budget on local buyers. You should examine the local housing market to understand what kind of home quality buyers are looking for. This will help you avoid over-repairing the property and wasting money. 

Moreover, there are additional expenses to flipping and wholesaling a property than just repairs and renovations. You might need to account for expenses like closing costs, holding fees, financing costs, and marketing costs. Make sure to include all necessary expenses to make your ARV calculation as accurate as possible.

Step 3: Perform a Comparative Market Analysis (CMA)

Now that you’ve got both components of the ARV formula, the final step is to calculate the property’s ARV and check your number by finding comparable properties or real estate comps. Real estate comps are either recently sold or up-for-sale properties similar to your investment property. This step is known as comparative market analysis or CMA for short. 

In a CMA, you should look for house comps that you expect your property to look like after the renovations. Ideally, you want to find comps that are:

• Within one mile of the property
• Located within the same block or same neighborhood
• Similar in age, type, size, square footage, number of floors, and number of rooms
• Featuring the same amenities
• Sold within the last one to three months

You want to ensure that the after-repair value you calculated in the previous step is in the same range as the value of the real estate comps. If the difference between your ARV number and the value of the comparable properties is by a large margin, it could mean you miscalculated. Or it could also mean your fix-and-flip deal will not make for a sensible real estate investment. 

All this pops the question: How do you find real estate comps in the US market?

Generally speaking, a good source of comps is the Multiple Listing Service (MLS) database. However, to get access to it, you need to hire a real estate agent or broker, as they are the only ones with access to it. But if you prefer working independently, you can use the Mashvisor real estate investment platform to do that. 

Related: How to Make Your Own Comparative Market Analysis Template

How to Find Real Estate Comps With Mashvisor

Using the Mashvisor investment property search engine, you can look for the city or neighborhood of your choice to get a list of properties in the area. You can use different filters to customize your property search to match the specifications of your investment property. The filter options include property type, square footage, number of bedrooms and bathrooms, and construction year.

Moreover, you can look at properties that are currently listed for sale and ones that have recently sold. Combining the analysis of these two is the best approach to finding real estate comps and conducting comparative market analysis.

After you set up all the filters, you will get access to a comprehensive list of homes that are similar to your own investment property. Most of these listings come from the MLS, meaning they are generally in good condition and an inhabitable state. Thus, you can use them to find the ARV of your house.

To start finding real estate comps and calculating ARV with ease for your house flipping and wholesaling projects, sign up for a 7-day free trial of Mashvisor.

You Should Also Know About the 70% Rule

There is a general rule of thumb that real estate investors use to determine the price that they should pay for a fixer-upper property. It’s known as the 70% rule. It calculates the maximum bid price on the property by taking into account both its after-repair value and the expected costs of its repairs.

The 70% rule formula is as follows:

Maximum Purchase Price = 70% x ARV – Estimated Repair Costs

The 70% rule states that investors should not pay more than 70% of the ARV of the investment property minus the expected costs of repairs. This is to ensure that they make a 30% return on investment.

How to calculate the ARV percentage is easy once you’ve estimated the after-repair value. All you have to do is to take 70% of it. Then you need to subtract the expected cost of fixing the property. The result is the maximum sale price that makes sense for your deal.

Let’s illustrate the 70% rule with a basic example. Let’s say that the after-repair value of your property is $200,000 and with an estimated repair cost of $30,000. Therefore, the maximum price you should pay for this property is:

• Maximum Purchase Price = 70% x $200,000 – $30,000
• Maximum Purchase Price = $110,000

This means that you shouldn’t pay more than $110,000 for the property for sale. If you pay more than this, you risk losing money on your house-flipping project. If, on the other hand, you pay less than this number, you’ll be sure to make a profit as long as you stay within your repair budget. 

When Do You Need to Know the ARV of a Property?

There are three main circumstances under which you need to know how to calculate ARV in real estate investing:

ARV in Flipping Houses

House flippers use the ARV to predict how much a fixer-upper property will be worth upon improving its condition. It helps them measure whether or not the profit margin suffices for the flip to become profitable. 

Determining the after-repair value is a very essential step in every house-flipping project. First of all, it tells you how much you can expect to sell the property after repairs and renovations. Second, it also gives you an idea of how much you should buy it for. Third, it shows how much you can afford to spend on renovations in order to emerge from the deal with enough profit to make it worth your while.

Without calculating ARV, you risk wasting a lot of time and money on your fix-and-flip project without making good money. That’s why it’s crucial to focus on repairs that cost relatively little but add a lot of value to the property.

ARV in Real Estate Wholesaling

House wholesalers need to know how to estimate ARV, too, because it comes in very handy in their deals. The main difference between flipping and wholesaling real estate properties is that with the second strategy, you don’t have to make any improvements on the home before reselling it.

However, just like flippers, wholesalers also frequently purchase distressed properties needing significant repair work. And many of their end buyers are investors focusing on the fix-and-flip strategy who prefer to–in a way–outsource the property search task to someone else.

Thus, in wholesale real estate, you need to know the potential future value of a property should it be fixed and repaired. In this way, you can market it better to house flippers and close more deals faster. The good news is that how to calculate ARV in wholesaling is basically the same as in flipping, so there’s no need to learn an additional formula.

ARV in Financing Investment Properties

Last but not least, many real estate lenders – outside conventional mortgage financiers like banks – look at the ARV of a property before deciding whether to finance it and how much financing to provide. Usually, they determine the maximum eligible loan amount as a percentage of the ARV of the property. The standard range is between 70% and 80% of the after-repair value of the investment home.

This generally applies to hard money lenders sponsoring fix-and-flip deals. But in some cases, it can also relate to financing the purchase of rental properties for sale.

Related: How to Get the Best Mortgage Rate for Investment Property in 2023

Getting Started With ARV

Now you know what the after-repair value formula is and how to calculate ARV without the help of an ARV calculator. Therefore, you can start looking for real estate properties to flip, wholesale, or finance.  Just make sure to follow the three easy steps outlined above to end up with successful and profitable real estate investments.

To learn more about how Mashvisor can help you locate the most reliable real estate comps in the US market, sign up for a 7-day free trial now, followed by 15% off for life.