What Does ARV Mean in Real Estate?

The goal when you do a flip is to make money. You spend a considerable amount of time and money on a property in hopes of selling it for a profit. But, how do you ensure you make money on your next flipping project? The first step when looking for a potential investment property is to calculate the ARV. Keep reading to learn more about this important step and how it affects your overall profitability.

 

What does ARV mean?

ARV stands for After Repair or Rehab Value. This is the estimated amount of money your home will be worth after you complete the necessary repairs and updates. While the ARV definition may sound simple, it actually involves a lot of calculations in order to get an accurate idea of how much your flipping project or real estate investment will be worth.

In real estate, the After Repair Value is one of the most important calculations for any home or project. The ARV is easy to define but difficult to determine for most projects. There is no specific resource or a single right answer for the ARV value of any home. You will be required to estimate the After Repair Value of your project yourself.

 

Why is ARV important?

The ARV affects almost every stage of the home flipping and selling process. Whether you are new to flipping real estate, or you’ve done it for many years, the estimated After Repair Value of your project is the most important piece of information you will determine during the process. It can impact your financing options, your timeline and exit strategy, and, most importantly, your profits. 

Incorrectly calculating your ARV can lead to a deficit at the end of a project or lower profit margins than expected. There is nothing more frustrating than investing your time and money into a real estate project, only to have it pay off a fraction of what you expected. This headache can be avoided if you understand the After Repair Value and estimate it properly.

Determining the ARV will help you find the margin between what you pay for a home (or what you can sell it for “as-is”) and what you can get for the property after a flip. This number is often how real estate flippers determine whether a project is worth their time and money. It is important not to play the guessing game when it comes to After Repair Value. Incorrectly determining or guessing the ARV can easily lead to a loss of funds and time on a project.

If you are seeking financing from a bank or other financial institution, the ARV is critical. You will likely have to give a pitch or provide documentation that includes the ARV. Real estate flipping is considered a risky investment by many financial institutions. They want to know they will get a return on their investment, and the ARV is one way to prove the opportunity that exists with your flipping project.

 

How do you find out property values?

There are three main steps to follow when it comes to calculating property values and determining the ARV for your next flip project. You should first analyze the comparables, then calculate your costs and expenses before finally building in room for a profit. Let’s break each of those steps down a little further.

 

Analyze the Comps

Comparables are also known as comps, and they include homes similar to your investment that have recently sold or are up for sale. You can use comps to determine the value of your house flip once all renovations and updates are completed. This step provides a glimpse into the amount you could potentially sell your finished flipped home for later.

You need to access the Multiple Listing Service (MLS) for a detailed look on all comparables for your property. In order to do this, you must be a licensed real estate agent or employ the services of one. The MLS can provide all relevant details on properties similar to yours that recently sold or are currently available for sale. 

Be sure to find homes that are as close to your potential investment as possible for an accurate ARV. Comps should be close in age and square footage to your project as well as room count. You should research the surrounding area to find similar neighborhoods, and it is best to limit your search within one mile of your potential property if possible.

You can also gauge market conditions by researching comparable properties. Look for homes that recently sold in the last 90 or 120 days and keep an eye out for seasonal changes in terms of price. You can get a clearer picture of the potential resale value of your property and learn if there is a best time of year to buy or sell.

 

Calculate Your Costs and Expenses

The second step is crucial to determining your potential profit margin. The cost of repairs is going to greatly impact how much you can pay for a property and determine whether it is worth your time. If you are using investors to finance your project, you will also have to provide this information in a pitch or overview document.

Hire multiple licensed contractors to view the property and provide estimates on repair costs. Estimates should be itemized so you can clearly see where your money or financing will be spent. Contractors should be capable of handling the work needed to avoid rework, overpaying, or extended deadlines. Unless you have a trusted contractor already, you should talk to at least three to five different options. 

There are many other additional costs to consider, and you should list out all costs and fees associated with a project when determining the ARV. Don’t forget to factor in the cost of materials, any taxes or insurance payments, utilities costs, and HOA fees. Any cost that is unaccounted for can eat into your profits at the end of your house flip project.

 

Buy at the Right Price

Some real estate investors and seasoned flippers recommend using the 70% rule to determine the appropriate purchase price for a property. Others tend to develop their own formula for purchase price over years of experience. Either way, you need to consider the ARV and flipping costs in order to decide how much you can pay for a home. The right purchase price can increase your profitability for a flipping project.

 

Conclusion

The After Repair Value (ARV) of a property is crucial in determining your purchase price and profitability for a flipping project. Real estate investors and house flippers need to pay special attention to this amount in order to budget for their project properly. The ARV can also help you determine if a flip project is worth your effort. 

If you are looking for a partner in real estate flipping, Wealth 212 is your answer. You can receive 100% funding for your next flipping project without having to pitch to investors. As a Wealth 212 member, you will also be able to access a considerable knowledge base built over years of experience and recommendations for contractors and suppliers. For new and seasoned house flippers, Wealth 212 offers a unique opportunity to start your next home flipping project, risk-free.