How To Calculate After-Repair Value (ARV) In Real Estate

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What’s the number one skill all real estate investors need? It’s how to accurately estimate after-repair value (ARV). This critical skill could help you determine if a property is a good investment or something you should pass on.

Knowing the value of a property is essential. Whether you’re a buy-and-hold investor interested in turnkey properties or a fix-and-flipper looking for a property needing serious work, you need this information. “Buy low and sell high” is real estate’s core success formula—but to know you’re getting a good deal when you buy, you need to know how to estimate future value.

Here’s how real estate investors can calculate ARV for single-family homes or other small residential properties. Commercial or larger multifamily properties are not covered here because they require a different process.

What is After-Repair Value (ARV)?

After-repair value (ARV) is a property’s estimated value after renovation. The ARV typically applies to distressed properties in fix-and-flip investments, but you can also use it to determine the estimated value of other properties. It factors the total amount spent on rehabbing a property, including major renovations and cosmetic improvements.

How ARV Works in Real Estate

The basics of ARV in real estate involve buying a property at a lower price than its estimated after-repair value. This is how house flippers make money—rehabbing properties needing repairs and then selling them at a profit.

For this investing strategy to work, you need to add enough value to a property to sell it for more than the combined total of the purchase price and the money you spend on repairs and renovations.

ARV Formula: How to Calculate ARV for Real Estate Investing

The most reliable way to calculate the ARV is to use what’s known as the sales comparison approach (SCA). Real estate investors, brokers, and appraisers use the SCA to estimate a property’s market value by comparing it to other properties in a community.

Because investors often buy fixer-uppers, this valuation can help you understand a property’s potential value—its ARV—before you make an offer. This quick analysis might be all you need for an experienced investor with in-depth knowledge of a neighborhood. For an inexperienced investor or someone new to a location, it may be necessary to calculate the ARV before getting help from others.

You can determine a property’s ARV in three steps:

1. Calculate the property’s current value
2. Calculate the value of renovations
3. Perform a comparable market analysis (CMA)

Step 1: Calculate the property’s current value

Before determining the ARV for a property, you must first acquire some information about it. You will be comparing it to other properties in step three, so you need to know its current market value to make an accurate comparison.

The best way to estimate a property’s current value is to hire an appraiser to do the job for you. Appraisers are highly experienced at evaluating properties and will be able to give a more accurate value estimate.

You can also determine the property’s value yourself, although you must know the local housing market well to obtain an accurate estimate. Here is a list of the local market information you will need.

Location:

• City or municipality (Is it inside or outside city limits?)
• Neighborhood
• School district
• Proximity to attractive amenities (e.g., a lake, ocean, restaurants, park, or cultural center)
• Proximity to negatives you can’t change (smells, loud noises, power lines, junky neighbors, or dangerous dogs)

Lot:

• Size (acres or square feet)
• Fenced yard
• Corner or interior lot
• Road traffic
• Major slopes
• Landscaping (is it mature or nonexistent?)

Property:

• Size (square feet)
• Number of bedrooms and baths
• Garage
• Type (house, condo, townhouse, etc.)
• Style (bungalow, ranch, modern, etc.)
• Year built
• Condition
• Finishes (Are there hardwoods or cheap vinyl? Granite counters or laminate?)

The MLS info sheet will include much of the location, lot, and building information, which you can obtain from your local real estate agent. You can find what you need elsewhere if the property is unlisted or the MLS listing excludes vital information. You can find details at your local tax assessor’s website or office, listing sites like Zillow, or via a Google search.

If possible, visit the property and check it out in person before estimating a value. This step may reveal important information you couldn’t obtain from a real estate website or the MLS. Be sure to bring a checklist that includes all the property information previously listed. It’s also a good idea to take as many pictures as possible.

Step 2: Calculate the value of renovations

Accurately calculating the value of renovations is crucial—it could mean the difference between making a profit and wasting an investment opportunity. The amount you spend on renovations should be less than the value your renovations will add to the property, which will help you maximize your profit when you sell.

As a rule of thumb, you can get a general idea of your renovation costs by getting quotes from several contractors. It’s a good practice to obtain at least three different quotes. That doesn’t mean you have to choose the cheapest contractor, however.

Although the cost of repairs is important, you want to ensure that the job is done well to maximize the selling price. You don’t want to over-rehab a property and lose money, but you also want to bring the property up to the standard buyers in your area expect—and will happily pay for.

Step 3: Perform a comparable market analysis (CMA)

After gathering the necessary property information, search for the best comparable properties (aka “comps”). This will allow you to do a comparative market analysis to see what similar properties are going for and to assess the current market conditions.

But where do you find them?

The best source of comparable properties is almost always your local MLS. A professional agent or appraiser can determine the best comps based on your search criteria, which is one reason why hiring an excellent real estate agent is important—you need someone who can send over comps regularly. If you are interested in buying a property and you are using a buyer’s agent, this is a reasonable request.

If you don’t have an agent and can’t access the market data from the MLS, you can obtain the information from other sources. For example, use sites like Zillow and Redfin to obtain recent sales price information.

Here’s what you should look for if you are finding comps yourself:

1. Recent sales: Ideally, in the last 3-6 months.
2. Similar location: For suburban properties, this often means the same neighborhood. It might be the same block or district for urban or in-town properties. For rural properties, it might be a certain distance from the property—likely less than one mile.
3. Size: Square footage should be within 15-20% of the subject.
4. Non-distressed, traditional sales: Unless most sales in the market are distressed or investor purchases, ignore distressed sales like bank-owned properties and foreclosures for comparison. Also, ignore home sales with seller financing or other sales with unusual seller concessions. However, you may not always be able to determine these deals by reviewing the MLS data.
5. Bedrooms and baths: The number of bedrooms and bathrooms doesn’t have to match. If you’ve used the first four filters and don’t have enough comps, you can include homes with more or fewer bedrooms and baths than the home you are evaluating. The goal of this step isn’t to find an identical comp, which is almost impossible. Instead, you want to find a group of comps that share the abovementioned broad criteria.

Next, create a spreadsheet with five to 10 potential comps. Make sure you include the following:

• Address
• Asking price
• Purchase price
• Bedrooms
• Bathrooms
• Square footage
• Garage
• Date sold
• Notes (such as days on the market and property condition)

Think like a potential buyer as you fill out the spreadsheet. You can do this by comparing the property you evaluate with your list. Look at the location, lot, and other property information, and ask yourself, “Is this comp better or worse than the property I’m considering?”

Next, add a column to your spreadsheet so you can state which comps are better, worse, or too close to call. You may also want to note the specific features that make each comp better or worse. For example:

• If property A sold for $130,000 but its only significant difference was one less bathroom, you might say the comp is worse.
• If property B sold for $120,000 and the only significant difference was its poor condition, you might also say the comp is worse.
• If property C sold for $150,000 and the only significant difference is the larger square footage, you might say the comp is better.

If you could confidently say that the property you are evaluating is worth $130,000-$150,000, a reasonable ARV estimate would be $135,000-$145,000.

If you use a fix-and-flip formula, plug in both ends of your value range to see how much you need to purchase the property to make your minimum profit. And if you’re buying rental properties, learn how to calculate rental property cash flow to ensure you don’t overpay. With this process, you can determine a rough value much faster than with other valuation methods.

Drawbacks of ARV Calculations

It’s important to remember that real estate valuation is just an educated guess. Even the best appraiser, broker, or investor can’t always predict a property’s future value accurately. The real estate market can change very fast.

We also deal with unique properties when determining ARV in real estate. No two deals are the same. Unlike the stock market, where one share of a particular stock is exactly like another, we usually compare apples to oranges with real estate.

As an investor, don’t take value estimates, appraisals, and CMAs at face value. Be skeptical, but don’t let the information keep you from taking action.

What Is the 70% Rule in Real Estate?

House flippers use the 70% rule to help them find properties to buy. The rule states that investors should look for properties that cost no more than 70% of the after-repair value, less the cost of the renovations.

Use this formula to calculate the 70% rule:

(ARV x 0.7) – estimated repair cost = maximum bid price

Compensating for Uncertainty

When calculating ARV in real estate, it’s important to compensate for uncertainty. One way to do this is to use ranges of values instead of exact numbers. Make the bottom number something you are very confident in—and ensure you can make an acceptable profit at that lower number.

Having multiple contingency plans is another way you can compensate for uncertainty. If you are selling and can’t get the purchase price you want, perhaps you can sell lower to cut your losses and move on. Another option is to rent the property and wait for the market to recover.

If you only have one plan, things may not work out as expected if the market turns against you or the economy experiences a downturn.

Another strategy to help you compensate for uncertainty is to build a margin of safety into every deal. Warren Buffett’s mentor, Benjamin Graham, wrote in his excellent book The Intelligent Investor, “If you were to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.”

Having a margin of safety in real estate means buying below the true value. However, the “true value” is only an estimate until a property sells. By factoring in a margin of safety into your estimation, you can compensate for changing market conditions and other factors.

Why Calculating ARV is Vital for Fix-and-Flip Investors

Knowing how to calculate the ARV can help determine if you can profit from an investment. Use this calculation when flipping houses and in the BRRRR strategy.

Flipping houses

The ARV is critical if you’re flipping a house. After factoring in the estimated repair costs, it can help you determine if the rehab property you are considering will be a good investment. If the combined total of the property and the repair value is higher than the appraised value of other homes in the community (the comps), the home isn’t a good investment opportunity.

The BRRRR strategy

If you’re rehabbing a property to buy and hold, knowing the property’s ARV is still very important because it will help you determine your equity position. This is critical if you plan to BRRRR the property (buy, rehab, rent, refinance, repeat).

If you plan on refinancing a property after you have rehabbed and rented it, the ARV can help you determine your current financial position with the investment. It will help you estimate how much money you will need to stay in the deal or how much you can take out to move on to the next deal.

Learning to calculate the ARV quickly and accurately will allow you to decide which properties to invest in faster. If you know a property’s ARV, you can make a confident offer, fix it after buying it, and then take it to market to flip it.

Even if the deal doesn’t go as planned, it’s important not to get discouraged by the setback. Entrepreneurs always make mistakes—even when estimating values. The more you practice calculating the ARV, the better you will get at it.

You can use your primary residence and recently sold houses in your community to practice calculating the ARV. Don’t look at the sale prices until you have determined the ARV. You can review the valuation process on each recently-sold property and see how close you come to the actual sale price.

The Bottom Line

Real estate valuation is not a skill you can master overnight. Expertise takes time and practice. By applying the ARV strategically and using it regularly, you can become a home value expert in your investment market. That niche expertise will help you become a successful real estate investor.

Do you have a quick valuation process that you use? What steps do you take? How do you gain confidence in the values of the properties you will buy? Let us know in the comments below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.