If you’ve been thinking about investing in fix-and-flips, it’s important to know what the property will be worth after the repairs and renovations are complete.
Fix-and-flips can be a great way to get into the real estate market without breaking the bank. However, before you jump in, make sure you know what after repair value (ARV) is and how it affects your profit margins.
To help you make a decision on whether or not this type of property is worth your time, money, and effort, here are some things to consider before making an investment. After all, if you don’t know how to calculate this metric, you could end up losing a lot of money in the long run.
What Is After Repair Value for Fix-And-Flip Investors?
After repair value is the amount a home can be expected to sell for at the end of the project. ARV can help investors quantify if a fix-and-flip property is worth their time and effort. And, if so, it can help determine which renovations or repairs would maximise the value of the property.
It is important for fix-and-flip investors to know a property’s after repair value because it can help them estimate their potential profits once they have completed their renovations, which will be reflected in the final sale price of the property.
Sometimes, this figure might also be referred to as after repaired market value, or even just market value—just keep your eyes peeled for what will be used most often in the area you’re investing in.
How ARV Works
ARV is an indicator of what people are willing to pay for a home.
It’s important for fix-and-flip investors because it factors in the repairs and renovations that have been completed on the property, its location, and other aspects that might affect its resale value at the end of the project—factors that you’ll need to know to determine if you are going to turn a profit after all your hard work has been invested.
The Importance of Calculating The ARV
The calculation of this metric is important for fix-and-flip investors because it helps them learn more about what people are willing to pay for a home in an area where they are investing. Calculating the ARV can help investors:
- Determine The Value Of The Investment
The ARV is the value of the property after it’s been rehabilitated. The ARV should be compared to what similar houses in the area and in similar condition have sold for. Typically your ARV will be near the top of the range of what other similar homes have sold for.
- Secure Necessary Loans
Lenders can offer ARV-specific loans to fix-and-flip investors. This means the loan can cover not only the property cost but also the cost of additional renovations, minimising the capital needed by the investor. The maximum amount of the loan is calculated based on the 70% rule, where multiplying the ARV by 70% yields the maximum loanable amount.
- Help Determine Selling Price
The ARV accounts for all planned improvements meaning what the home will be worth once the project is complete. . As such, your final selling price should be close to what you calculated for your ARV. However, changes in the housing market can impact the ARV.
- Calculate Potential Profit
A low purchase price for the property and low renovation costs favours a generous profit margin for the investor. ARV can help investors predict what this margin will likely be. To calculate potential profits, the investor will start with the ARV and subtract all costs associated with doing the deal. These closes include, the purchase price, the renovation costs, the closing costs, and any holding costs.
How To Calculate The ARV Of A Fix-And-Flip Property
There is only way way to value real estate and that is through comparable sales or comps. A good appraiser or agent will look a only the best handful of comps and use those to estimate the value. If the ARV is the target, you will want to focus on homes that are in great condition, similar to what the subject will be once the project is complete. You can use automated valuation models, like RedFin or Zillow but those account for a wide range of comps instead of focusing on the best and often offer less then accurate information. Ask your agent or an appraiser for help as you learn the best way to find and analyze your comps.
After Repair Value Mistakes You Should Avoid
Avoiding ARV mistakes generally comes down to being aware of the market value of properties in your area.
If you take the time to consider all of these factors prior to starting your project, then you’ll be able to determine whether or not renovating the property is worth your time, money and energy.
- Using The Wrong Comps
If you are using the wrong comps, then your ARV estimate will be inaccurate.
For example, if you are looking to buy a home that has 1,000 sq feet , but you are basing your ARV on homes 2,000 sq feet, then it’s likely that your estimated ARV will be higher then it really is. This is because people would be more willing to pay more for larger homes. This is a quick way to lose money so be careful when selecting your comps.
- Making Too Many or The Wrong Adjustments To The Values
One of the biggest mistakes that can happen when calculating after repair value is making too many or the wrong adjustments to the values.
For example, if you are basing your ARV on homes that are larger you would need to adjust their value down to match your home. This adjustment down can be tricky and if you do not adjust down enough, you may be overestimating your ARV and end up losing money. This is why it is important to always use more than one comp.
- Using The Listing Price
Some investors use what other houses in the area are listed for to estimate their ARV. The problem with this is that sellers can list a house for any amount they want but that does not mean the house is worth that amount. It is always best to focus on comps that have actually sold.
- Using Home Value Instead Of After Repair Value
You’ll need to look at the after repair value instead of the current home value if you want to estimate what you can get out of the renovations. Some homes go for a higher ARV and this is because people are willing to pay more for a better maintained property.
- Using Tax Values
You’ll also want to avoid using tax values or insurance values when coming up with an ARV estimate. These numbers might not accurately reflect the state of the property and its current market value. Tax values use limited data and are normally behind current pricing. If your home has appreciated, the tax value may not reflect that. If the home has lost some value, that too may not be accounted for.
Calculating ARV Is Essential For Successful Fix-and-Flip Investing
In conclusion, it’s important to calculate the ARV of a fix-and-flip property before you invest in any project. You’ll want to avoid making these mistakes when calculating your after repair value estimate: using listing prices instead of values, using tax values , and adjusting values too much.
If you are looking for help with figuring out what numbers will work best for your particular project or need help deciding if this type of investment is right for you, then let us know!
Our team specializes in working with investors who want their projects to be profitable while also being sustainable, so they can continue generating revenue over time. We would love nothing more than to help you get started today!