ARV or ‘After Repair Value’ is one of the most common acronyms in real estate.
It is particularly relevant to property entrepreneurs, developers and flippers and even more so to anyone seeking a hard money loan.
ARV is a cornerstone metric because it determines a property’s potential resale value and helps guide key decisions such as purchase price, renovation budget and financing options.
Developers who miscalculate an ARV can ultimately make little return or even lose money on their projects.
The After Repair Value considers a property’s current value.
It then factors in the cost of improvements planned for the property, to arrive at a number that lenders take very seriously.
Here’s how to calculate an ARV, how to use it and why it is so important.
Calculating the ARV (After Repair Value)
The formula for calculating the ARV of a property looks like simple addition.
ARV = a property’s current value + the value of renovations
But determining those values and ultimately the ARV is a little more complex.
That’s chiefly because there is a degree of guesswork and variability in determining the value of renovations.
Money spent on repairs to a property is not always rewarded with the desired margin of profit.
This may be for any number of reasons including:
- market conditions
- the location of the property
- supply and demand in the area
- current and emerging trends
- unexpected delays or rises in building and renovation costs
Developers need to pay close attention to market trends in their area of purchase, examining sales prices for comparable properties to help them more accurately determine a property’s ARV.
When scouring comparable properties, remember to look for ones that are:
- in the same neighborhood as the one you are renovating
- are of a similar age
- have a similar square footage
- are a similar style of property
- will be in similar condition after renovations
The importance of ARV
Accurately calculating a potential renovation’s ARV is vitally important because if you get the numbers wrong, you stand to lose money.
Hence, primarily, it is used to assess a property’s potential for profit generation.
The 70% rule
It is also used to help buyers determine the maximum amount they should pay for a property.
Many buyers observe the 70% rule using the following formula:
Maximum purchase price = (ARV x 70%) – Renovation Costs
Hence for a property with an ARV of $500,000 and estimated renovation costs of $50,000, the maximum purchase price would be $300,000.
($500,000 x 0.7) – $50,000 = $300,000
This would leave a profit of 30% or $150,000, provided the renovations costs do not rise and the ARV is met.
Hard money loans
ARV is particularly important for property developers and flippers who rely on hard money loans.
Many of these entrepreneurs won’t be able to secure bank finance for any number of reasons.
These may include but are not limited to:
- poor credit history
- project deemed too risky
- insufficient downpayment
- short time frames
- project already under finance
But hard money lenders are not necessarily dissuaded by these factors.
They lend money based solely on the borrower’s capacity to repay the loan.
That capacity is linked inextricably to the property’s ARV.
Tips for accurately calculating ARV
When arriving at a figure for the value of renovations and ultimately a property’s ARV, there are four important factors to consider.
Research comparable sales (comps) – Do your homework and scour platforms like Zillow and Redfin to compare similar properties, considering proximity to schools, beach access, transport and views. Only factor in sales within the last 3-6 months.
Renovation scope – Consider the merits of specific improvements for the property such as kitchens, bathrooms and energy efficient add ons which are particularly coveted in California.
Work with experts – Enlist the services of professionals such as real estate agents and appraisers to more accurately arrive at a likely return.
Adjust for market conditions – California’s real estate market is particularly sensitive to trends from the tech industry, interest rate fluctuations and zoning changes. Account for these when projecting your ARV.
Common mistakes
Overestimating ARV – It’s human nature to talk up your project but this can be a costly mistake. Overoptimistic projections can lead to overspending on purchase price or renovations. Always rely on accurate comps and expert input.
Underestimating renovation costs –California’s labor and material costs are higher than the national average. Ensure you have detailed and realistic estimates, giving yourself a margin of leeway to allow for delays or price rises.
Ignoring market trends – Trends can change quickly. Failing to account for economic shifts such as interest rate movement, inflation, zoning changes or local demand can make your ARV inaccurate and ultimately cost you time and money.
Get advice today
A property’s ARV or After Repair Value is the magic number by which every property developer or flipper operates.
Get it right and you are on the road to real estate riches.
Get it wrong and you stand to work for nothing or even worse, lose money.
In California, no-one knows more about property development and all of its nuances and challenges than Equidy.
Equidy has an intimate and personal history with property, and has covered all aspects of real estate and property development in California for more than 40 years.
Equidy is also a hard money lender with one of the most respected and enviable reputations on the west coast.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in challenging economic times, they strive to reward entrepreneurship and always help their clients crystallize their wealth creation dreams.
But best of all, Equidy is not just a financier.
They have an intimate knowledge of the industry and work closely with their clients to ensure they arrive at accurate assessments of ARVs and renovation costs.
They also work creatively with them every step of the way, providing their wealth of knowledge and support network as their clients’ projects take shape.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimise the risk to all parties.
Contact Equidy today to book your free strategy call.
