Key Takeaways

• Secure better financing for your project by presenting lenders with a realistic After Repair Value.
• Calculate a property’s future worth by analyzing the sale prices of at least three similar nearby homes.
• Protect your investment by using ARV to create a realistic renovation budget that avoids overspending.
• Discover that comparing properties is often more accurate than using a simple purchase price plus renovation cost formula.

The ARV represents the estimated value of a property once all necessary repairs and upgrades are complete. Real estate investors can leverage after repair value to strategically plan renovations that yield high returns. On the other side, without an accurate ARV, you may risk overspending on renovations or misjudging your potential return on investment. Continue reading this article as we cover the importance of after-repair value and how to calculate it. 

What is After Repair Value?

After Repair Value (ARV) is an essential metric in real estate investing, particularly for those involved in property rehabilitation or “flipping” houses. It represents the estimated market value of a property after you’ve completed all the planned repairs, renovations, and improvements. After Repair Value is what the property is expected to sell for once it’s in its fully upgraded and market-ready condition. It’s not the current “as-is” value of the property, but rather its projected future value.

Importance of Assessing After-Repair Value 

Profitability Assessment

Get a better picture of your potential profit by using the after-repair value to determine if a project is worth the investment. An accurate ARV gives you a clear understanding of a property’s future worth. On the other side, a high ARV could indicate a higher pay-off, and justify the time, effort, and capital you put into acquiring the property.

Making Investment Decisions

Another important use of ARV is that it can help investors make important financial decisions. On its own, the ARV of a property can tell you whether it’s financially viable or not. Many experienced landlords use guides like the 70% rule, which strongly recommends that buyers do not exceed 70% of the estimated ARV when buying a property. 

However, the numbers aren’t always that straightforward, and with a decent strategy and a stable market, most investors will turn a profit. That’s why experienced investors don’t use ARV as a stand-alone tool. They also compare it to other properties, allowing them to determine if it makes more sense to opt for one house over the other, or explore a different property type instead of playing it safe. 

Securing Financing 

An accurate computation of the after-repair value allows investors to pay off their hard money loan earlier if the property sells. Most investors opt for hard money loans to finance their house flip, and these lenders often rely on ARV to determine the maximum loan amount they are willing to provide. Understanding how lenders review your application, especially with collateral-based loans, can give you an edge in securing financing. A realistic ARV demonstrates to lenders that the project is sound and that their investment is in good hands. Aside from getting a speedy approval, it also increases your likelihood of obtaining favorable loan terms. 

Budgeting and Planning

ARV is essential for budgeting and detailed project planning. Knowing the target ARV helps investors focus on renovations that will yield the highest return and avoid over-improving a property for its market. It also allows you to spend your money better and keep renovation costs in line with the expected increase in value. This foresight helps to minimize unexpected expenses and keeps the project on track financially.

How to Calculate After-Repair Value? 

Formula

The most basic formula for ARV is:

ARV = Purchase Price + Value of Renovations

For example, let’s say you want to purchase a house for $200,000, and your total renovation costs are $80,000, then the ARV is $280,000. However, most professionals rely on comparable sales rather than this simple formula, as it gives a more accurate market-based estimate. 

Comparable Sales

The second method of calculating ARV is by comparing it to the sales price of similar properties. However, it’s difficult to get a one-to-one comparison that matches your home’s specifications. That’s why experts often recommend arriving at this figure by reviewing at least 3 recently sold properties in the same area with similar size, condition, and features. Of course, you’ll also have to adjust for any differences, such as the number of bedrooms, lot size, or amenities, which can be tricky. 

For example, if a property down the street sells for $350,000, it might be tempting to value your home at the same price. But in reality, your lack of specific upgrades makes your property less appealing. Despite that hiccup, many experts believe the comparable sales method is the best, as long as you use it right. 

Per Square Foot

If you live in an area where property values and styles are consistent, using the per square foot may be your best option. This method uses the comparison approach, but allows for more adjustment by dividing the sold price by the total square footage. 

For instance, A 1,500 sq ft home sold for $300,000 has a price per square foot of $200 ($300,000 / 1,500 sq ft). 

Here is an example ARV computation for a larger property, at least 2,000 sq ft. 

ARV = (Average Price per Square Foot of Comps) × (Your Property’s Post-Renovation Square Footage 

= $200 × 2000 sq ft

= $400,000

This method provides a strong baseline for your ARV. However, you also have to make qualitative adjustments for any differences between your property and the comps that aren’t captured purely by square footage. That could include perks such as a significantly better view, a larger yard, or a premium location within the neighborhood. 

Conclusion 

Accurately calculating After Repair Value is an asset that can increase your potential profitability, guide smart investment decisions, support financing applications, and ensure renovation plans stay aligned with market expectations. By using a combination of comparable sales and price-per-square-foot analysis, investors can arrive at a realistic ARV. With this figure in hand, you can make better decisions and succeed in the real estate market.