After repaired value (ARV) is the projected worth of a property once renovations or other improvements are complete. To estimate the ARV, an appraiser reviews the property's value both before and after the work is done, giving investors a complete picture of the asset. Understanding ARV matters to investors because it helps them avoid losing money when an improved property is sold. A strong real estate investor isn't simply the one who estimates a property best — it's the one who buys low and can sell high, and that skill depends heavily on grasping a property's ARV.
Calculating ARV
If you can't determine or estimate a property's ARV, your investing career likely won't last long.
It's a complex estimate, but the ARV always comes down to this:
ARV = Property’s Current Value + Value of Renovations
Here, the property's current value is its worth before any improvements.
The value of renovations is the total amount spent on the work.
Apart from the formula above, there are essentially three ways to estimate a property's value:
- Income Approach. This method is often used by owners whose property generates income, such as rentals. Here, the income a property produces is treated as its value.
- Cost Approach. Here, a property's value is based on its age and the cost to replace it.
- Sales Comparison Approach. This is the most widely used and accepted way to estimate a property's value. The property is compared with similar properties that sold recently, usually nearby, to establish its current worth.
The Sales Comparison Approach remains the best and most widely used method for estimating property values. To calculate ARV, a specialist in property valuation — an appraiser — inspects the property's value before and after the repairs are completed, based on the list submitted by Rehab Financial. As noted above, the ARV formula the appraiser uses is:
ARV = Property’s Current Value + Value of Renovations
In this case, the appraiser adds the purchase price to the added value created by the renovation expense described earlier.
This is a straightforward task for seasoned real estate investors. They know the area so well that they're comfortable estimating and predicting property values, having worked with such properties for years.
Today, real estate investors rely on the most common and dependable ARV method, known as the 70% of ARV rule. With it, fix-and-flip investors set a maximum bid that covers unexpected renovation costs while still leaving room for a reasonable profit.
The formula real estate investors use for the 70% of ARV rule is:
Maximum Bid Price = (ARV x 70%) – Possible Repair Costs
As the equation above shows, the 70 percent rule means an investor pays 70% of the property's ARV, minus the estimated repair costs.
