What is the most important factor in a fix-and-flip project? What is a real estate investor most concerned about? Yes, you guessed it right, the after-repair value. The after-repair value of a house determines the potential of a great real estate flip.
House flippers and private investors are always in the hunt for a potential real estate property that can be easily fixed or repaired and flipped for a higher profit margin. ARV helps them estimate the value a property can achieve in the market, after the essential repairs and renovation.
Investors spend a significant amount on repairs and renovation to increase the value of a distressed property. The cost of repairs or renovation and the value added by it, may not always be the same. The value vs cost 2021 report on the national and regional level clarifies how different renovations provide a different rate of interest.
What is the After Repair Value?
In simple words, after repair value, is the value of the property after it has been fixed or repaired and ready to be sold. It includes the total renovation value and the estimated selling price of the property.
It is a calculated risk that every real estate investor has to take into consideration when financing a house flip. ARV is a crucial factor that defines the performance of a property in the real estate market.
How to Calculate After Repair Value (ARV)?
The formula to calculate ARV is:
Current Value of The Property + Repairs or Renovation Costs = After repair value (ARV)
For example, if the current value of a property is somewhere around $175000 and the repairs will cost you around $35000, the ARV of the property will be:
$175000 (Current Value) + $35000 (Repairs cost) = $210000 (ARV)
How is After Repair Value (ARV) determined?
Calculating after repair value (ARV) of a property is a skill, a seasoned real estate investor may determine the value of a property they have renovated or the ones that are ready to sell.
To determine the after repair value of a property you’ll need to consider the following things,
1. Appraisal of the Current Property
You’ll need to get an appraisal done for estimating the exact ‘value’ of the current property. A licensed appraiser will closely examine the property and help you identify all its traits.
A professional appraiser will perform a detailed walk-through of the property. Things they may look for can be as following:
Exterior
- Quality of the construction
- The cohesion of roof and foundation
- Drainage system
- Water system
- Parking Facilities
- Curb Appeal
- Location
Interior
- Number of bedrooms and bathrooms
- Size of the kitchen and other rooms
- Electrical and plumbing system
- Fire escapes and handrails
- Overall condition of the interior surface (Cracked walls or ceilings)
(Pro Tip – Neighborhood and location of the property play a key role in the appraisal.)
2. Analyzing the Comparables
The next step in determining the ARV is analyzing the comparables or commonly known as “comps”. The best way to gather detailed information about comparable properties is MSL or multiple listing services.
Multiple listing service gives access to the information of properties which are up for sale or have recently been sold.
One should consider the following things while analyzing the comparables
- Comparing the most similar properties
- Homes in the similar neighborhood
- Homes sold in the last 2 to 4 months
- Homes of similar size, age, room counts, square footage, etc.
An expert real estate investor will always consider the market conditions and trends to forecast a property’s resale value.
3. Estimating Costs and Expenses
This is one of the most crucial parts while determining the ARV. Repair costs play a major role in deciding whether a deal is worth pursuing or not.
Not every property needs to have the same kind of repairs, but some repair costs and expenses can be commonly found in a rehab property that every investor should consider.
Possible Interior Repairs:
- Paint
- Flooring
- Kitchen
- Appliances
- Bathroom
- Framing
- Insulation
- Walls
- Doors And Trim
Possible Exterior Repairs:
- Roof
- Gutters
- Siding
- Masonry
- Painting
- Windows
- Garage
- Landscaping
- Concrete and Asphalt
- Wooden Amenities
- Septic
- Pool
Though the above list is a mere representation of what kind of repairs a distressed property can have; repairs and renovations may vary from one property to another.
Why is ARV Important for Real Estate Investors?
Fix-and-flip is a popular investment strategy amongst real estate investors. The after repair value (ARV) helps investors determine the maximum value they should pay for a house, the cost of repairs, and most importantly planning for their finances.
Most investors opt for hard money loans when it comes to financing a house flip. Private lenders also use after repair value (ARV) to decide how much to lend a real estate investor, while issuing a hard money loan.
Investors can use ARV to determine the price to purchase a property. The 70% rule can be very useful for real estate investors to obtain the maximum offer price for a property.
What is the 70% Rule in Real Estate Investment?
The 70% rule is more of a guideline for every real estate investor who tends to purchase a property to flip. According to the 70% rule, when purchasing a property, an investor should not offer more than 70% of the ARV (minus the repair costs).
Still, confused? Let’s have a look at the following example.
Let’s consider, a real estate investor who wants to flip a house with an ARV of $200000 and the estimated cost of repairs goes up to $40000, then the maximum offer an investor can make for the house could be,
ARV x 70% – Repair Costs = Maximum Offer Price
$200000 x 0.7 – $40000 = Maximum Offer Price
$140000 – $40000 = $100000
The 70% rule will only work if you get accurate after repair value (ARV) and the repair costs of the property you are willing to invest in. This allows an investor to cover up their holding costs, closing costs, taxes, and other expenses.
Exceptions to the 70% Rule
There are some exceptions to the 70% rule. An investor should use his experience and skills to determine how to make the best use of this thumb rule while making an offer.
Low ARV Properties
A property with a lower than usual ARV does not go well with the 70% rule, a low after repair value means a minimum scope for making profits.
High ARV Properties
An investor will need to raise the percentage up to 75% for a property with a high after repair value.
Takeaways
A real estate investor needs to determine the after repair value (ARV), as it decides if a property will be profitable enough after essential repairs and renovation or not. To determine the projected value of a property, an investor should firstly know the property’s current value.
An investor should know the conditions and trends of the market as well as the neighborhood to better analyze the comparable properties. Estimating the costs and expenses allow an investor to better finance a house flip.
Financing a fix-and-flip project requires funds upfront, 14th Street Capital provides hassle-free hard money loans based on the ARV, designed to fulfill every need of a real estate investor. Get quick hard money loans with minimum paperwork and underwriting. 14th Street Capital is the best funding source for your every house flipping project.