ARV in the real estate world stands for After Repair Value. This is an estimate of the potential monetary value of a property after it has been bought and then completely renovated. These renovations usually include cosmetic work, repairs, rehab or remodeling work. The ARV can also be referred to the FMV, or the fair market value. Finding this value is the #1 step to flipping houses or properties and is often left out of popular TV shows about this process.
This estimated value is important to investors because it gives you an idea of what you should spend on buying the house to begin with, how much you need to spend on the renovation and how much you should resell it for in order to make a profit. Without an idea of the ARV, you may find that you wasted time and money flipping a house. “If you don’t know your ARV then you have no place to work back from.”4
What is As-Is Value?
To understand ARV, you have to understand the term As-Is value, since it comes up often in real estate conversations. It simply refers to the current value of a property before any repairs or remodels. This is what you will typically pay to acquire the property before you begin work. It is important to know this because if the ARV is less than the As-Is Value, it won’t be a profitable project for you.
How do you calculate an ARV?
When looking at the viability of a home renovation/house flipping project, an investor has to be able to make an accurate estimate of the After Repair Value. This requires the ability to collect repair and remodeling estimates with accuracy, as well as knowledge of basic renovation requirements, pricing and timelines.
It is best to estimate high so that you create a buffer for unexpected costs or delays. There are repair estimation resources that use quality materials and contractors. Also make sure to get guarantees on the work you solicit. Check local pricing over national guides so you know you’re getting the best deals available to you.
The easiest way to calculate the ARV is like this:
- Review local home sales listing prices (not asking prices).
- Find properties that are comparable to yours, in the same subdivision or in the same neighborhood. These are often referred to as “Comps” can be used to determine the going rate for properties like yours. Websites like Zillow and Redfin are good for finding these figures. Remember to look at not only houses for sale, but ones that have recently sold as well.
- Get itemized estimates from 3-4 licensed general contractors.
- Gather a price list of supplies and parts that will be required to fix up the property.
The first two steps give you an idea of the ARV, which is more of an estimate and less of a specific price. The next two steps give you an idea of how much it will cost to flip your house. If the As-Is Value and steps 3 and 4 comes out to be more than the figures you got from the first two steps, you may want to find another property.
Tips for Looking at Comps
It’s recommended that if you can either work with an agent or become an agent, you refer to the Multiple Listing Service. The MLS provides details on properties that are up for sale or have recently been sold. It is the best way to calculate your ARV.
When exploring Comps, check for properties sold no more than 120 days ago, are less than a mile from your property, have the same age, size, square footage and bed/bath count and are in a similar neighborhood.
Sources:
http://www.fortunebuilders.com/as-is-arv-market-value-what-does-it-all-mean/
http://www.houseflippingonline.com/after-repair-value.html
http://houseflippinghq.com/4-steps-evaluating-house-flipping-deals-ensure-killer-profit/