Understanding the Importance of After Repair Value

If you are an aspiring fix-and-flip real estate investor, there is a wide range of factors you have to take into account during the due diligence process to make sure that the transaction will be a profitable one. One of the most important metrics to assist investors during this process is an accurately calculated After Repair Value (ARV) for the property. The experienced team of financial professionals at Gauntlet Funding have composed the following breakdown of ARV and how it can help you develop a profitable investment strategy.

After Repair Value (ARV) Basics

The ARV is the projected valuation of a given property after the rehab process is completed. It is mainly used by fix-and-flip investors who specialize in purchasing distressed homes, making renovations, and then reselling it at an increased price in a relatively short timeframe.

ARV Calculation Method

The good news is that the math behind generating the ARV for a property is relatively straightforward:

ARV = Purchase Price + Value of Improvements

Although you automatically have half of the equation (the purchase price) settled from the start, the challenging aspect is accurately forecasting just how much value your planned renovations will add to the property. This is important because your profit margin will be largely dependent on what the resale price will be.

Determining the Value-Add of Renovations

There are two basic approaches to estimating the value of the renovations you want to make to a fix-and-flip property:

1. Analyze Comparable Properties: “Comps,” or comparable properties, are homes in the local geographic area that are similar to your project. They should have been built around the same year, have nearly identical square footage, the same number of rooms and matching features/amenities. To ensure accuracy, look for homes that were purchased within a couple of months and are in the same neighborhood as your investment property. A great way to search for comps is visiting the local MLS listings or online platforms like Zillow.
2. Licensed Appraiser: Consulting a licensed appraiser not only eliminates some of the confusing guesswork involved with evaluating comparable properties, but it also uncovers any potential issues associated with the home—giving you time to address them before putting the home on the market for resale at which time it may be too late in the process to fix them.

ARV Hypothetical

Let’s try an example of an ARV calculation to get a better grasp of the concept. Say you find multiple 1,500 square-foot comparable homes that feature most of the planned renovations you are planning to make on your fix-and-flip project. They all sold within the past two months at around $230,000, meaning the price per square foot is around $153.33. If the fix-and-flip property has a square footage of 1,350, the ARV would be estimated at $206,995. This is the max sales price you can anticipate.

Applying the “70% Rule”

Real estate investors often reference the “70%” rule when deciding what their maximum purchase price should be for a fix-and-flip project. Here’s how to apply it:

(ARV x 0.70) – Repair Cost = Max Purchase Price

So for the example above, 70% of the ARV of $206,995 equals $144,896. Say your expected repair cost is $30,000. That means the maximum amount you would want to spend on a fix-and-flip would be $114,896.

A Trusted Lending Partner

The real estate market is a dynamic and fast-paced industry. Accordingly, investors require flexibility and experienced insight to successfully garner consistent returns. That’s exactly what Gauntlet Funding has to offer. Our New York-based team of financial professionals specializes in delivering individually-tailored funding solutions for all types of investment projects—all in a fraction of the time and hassle associated with obtaining a traditional mortgage through a bank. Contact us today to learn more about how we can assist you in identifying lucrative market opportunities and grow your investment portfolio!