*updated December 2, 2024
ARV Meaning in Real Estate?
When it comes to real estate investing, ARV meaning is “after repair value,” and it’s a crucial metric. It represents the projected future value of a property after necessary repairs are completed. Understanding ARV is essential to maximizing your potential profit margin and making informed decisions in the real estate business.
Having completed over 2,800 transactions at Bright Bid Homes, we know that accurately estimating ARV is a cornerstone of success. ARV isn’t just a formula—it’s about analyzing key factors like market trends, estimated value of a property, and planned repairs. Misjudging ARV can disrupt your entire investment strategy, from the purchase price to final ROI.
Why Is ARV in Real Estate So Important?
ARV enables seasoned investors and beginners alike to evaluate whether a property is worth pursuing. By estimating the property’s market value post-renovation, investors can decide on their maximum loan amount, calculate returns, and identify potential profitability. It’s also a key tool for house flippers, wholesalers, and hard money loan lenders when evaluating the potential of a property.
How to Calculate ARV
Calculating ARV follows a simple basic ARV formula:
(Current Market Value of Property) + (Value of Repairs) = ARV.
You’ll need real estate comps—recently sold similar properties in similar condition and location. These comps, analyzed through a Comparative Market Analysis (CMA), offer a better idea of the Annual Rental Value or resale price.
For instance, replacing an outdated roof can boost a property’s value. By comparing homes with and without a new roof, you estimate the added future value of a property.
Factors That Drive Real Estate ARV
Several factors influence the ARV of a property, including market trends, square footage, curb appeal, and renovation costs. The condition of the distressed property also plays a significant role in determining its estimated ARV.
However, the most unpredictable element is the real estate market itself. Changes in property’s current value, market conditions such as interest rates from the Federal Reserve or shifts in the average price of homes, can drastically affect the potential value of the property. By closely monitoring these market trends, real estate investors can adjust their strategies to maximize their return on investment and plan their renovation projects more effectively.
If, for example, there is a growing desire in the area for homes with in-law suites or ADUs in Texas they may plan on adding one to the prospective property. However, there is also the chance that local market will change before the repairs are complete, no longer matching the expected profit.
Additional square footage to the property and increased curb appeal consistently boost ARV. The majority of home buyers desire more space in their homes, so increasing the usable square feet through additions to the home or completed conversions will nearly always generate more value than the total cost of renovations. Improved curb appeal also brings immediate value. Home buyers want a property that looks nice and will shop from the street first, so simple upgrades to the exterior will be beneficial.
Finally, the actual renovation costs have a monumental impact on the final ARV meaning. The value of renovations and cost of repairs can shift significantly once the actual work begins. For this reason, it is important to obtain multiple contractors and repair estimates in order to get a clear idea of where actual costs may end up.
Walking the Property To Get the ARV
It is also vital that an investor thoroughly inspects the condition of the property for necessary repairs before calculating the ARV of the property. A severely distressed property will require more repairs and can affect ARV either positively or negatively depending of the cost and value of those repairs.
The property “inspection” which our team calls “walking the property” is one of our biggest advantages. With over 5000 property walks under our belt in Texas, there are very few things we have not seen.
From condemned properties to eviction damages to storm and water damaged homes, we have a keen interest and the ability to handle those types of home seller situations. In fact, we have seen so many houses in Texas, we can rely on our deep experience to know how to handle the toughest distressed property situations.
If you give us 2 hours inside a house to evaluate its condition, and we can generate an estimated renovation budget and get a very accurate ARV for the house. We have found this value-add ability to get an ARV estimate done within two hours as a major edge to investors and homeowners who are interested to sell a house quickly.
Importance of ARV in Real Estate Investing
What does ARV mean in real estate? Investors want to purchase properties at low prices, improve them and sell them for a profit. This ARV meaning requires due diligence on the part of the investor and an understanding of how much value is being generated and targeted ROI. House flippers, wholesalers and real estate industry professionals all find great use in potential profitability calculations.
ARV calculations help real estate investors determine the maximum allowable offer (MAO) they should make on an investment property. One widely-used method is the 70% rule, a good rule of thumb in real estate investing. This rule suggests that investors should set their maximum purchase price at 70% of the ARV minus the estimated repair costs.
This allows for a comfortable profit margin while accounting for potential uncertainties in renovation projects and market fluctuations. The remaining 30% grants the investor an adequate profit margin and room for unexpected costs. Again, the largest and most difficult ARV X factor in the 70 rule calculation is being able to narrow down the “repair costs” to be useful and accurate.
ARV is particularly beneficial when flipping houses. It helps the investor estimate profit potential and make informed investment decisions. Calculating ARV and comparing it to potential repair costs and purchase price enables a house flipper to determine their potential return on investment (ROI).
(After Repair Value) – (Estimated Repair Costs) – (Purchase Price of the Property) = ROI
The solution to this formula helps an investor or homeowner decide if specific renovation projects will provide acceptable profits. It is important to note that holding costs, such as utility payments and property taxes, will decrease ROI as well.
ARV is also a vital part of the home buying and selling strategies of wholesaling houses. Wholesalers use ARV to negotiate deals and market a subject property to potential investors. A wholesaler can use the estimated repair costs to negotiate a lower purchase price of a distressed property.
They can then use ARV estimations to market it as a profitable deal to other investors. Knowing the ARV of a property and applying the 70% rule helps wholesale real estate investors quickly locate profitable properties and properly plan their exit strategies for property movement.
Real estate agents even use ARV when assisting buyers and sellers in the housing market. By looking at potential estimated repair costs and ARV, an agent can help a seller list their property at a competitive price or help buyers make informed decisions about prospective properties.
Real estate agents have ready access to tools that use CMA and ARV to make accurate pricing recommendations. Access to the Multiple Listing Service (MLS) makes this process even more accurate, allowing Realtors to quickly search all the “on market” listed properties.
This insider knowledge and understanding of ARV enables them to guide their customers, especially potential investors, toward properties that make the most financial sense for each circumstance.
Common Pitfalls in ARV Calculations
It is imperative (and easy with due diligence) to avoid some common pitfalls of ARV calculation in real estate investing. Since ARV is a projection, it is easily skewed by overestimating the renovation value or underestimating repair costs. This is why it is a good idea to pull multiple comparable sales when determining ARV and to collect repair estimates from real estate professionals when determining repair costs.
It is also difficult to determine the exact value a certain repair will have, because even comparable properties have many influences on home prices and none are perfect matches. It is absolutely critical that a buyer do their due diligence when inspecting a potential property.
The current condition is crucial to the calculations and unexpected or unplanned repairs can destroy a projected profit margin. While all of these precautions help maintain realized profits, it’s essential to understand that no ARV estimate will be 100% accurate.
Factors such as unexpected repair overruns and sudden changes in market trends can significantly impact the final sale price of the property. Investors should always leave room for flexibility which we call internally a “safety buffer” when using ARV calculations to ensure their profit potential remains intact, even when plans don’t go exactly as expected.
Case Study: Lost A Wholesale Deal That We Were Okay With Getting Outbid
Never overpay for a house. If you want long-term success in real estate investing, being patient and not chase a selling price higher is critical. Here is an example from last year in Arlington TX where we lost the deal and it was the right thing to do. The best way is sometimes the deal never done!
The deal came from a real estate wholesaling company in the Wedgwood neighborhood of Fort Worth. We walked the property and calculated the current property value and internal estimate of $76,571 for the scope of work for renovation and repairs.
The house was built in the 1970’s house with foundation issues with visible cracks on the walls and the house walked slanted. For us at Bright Bid Homes, this raises an immediate red flag. Houses built before 1984 in Texas with foundation issues, usually will need their cast iron sewer plumbing lines replaced with PVC plumbing. This is extremely expensive and very labor intensive. This one-line item adds in the range of $20,000 to $35,000 to the cost of the rehab. In addition, the house needed a full cosmetic rehab to bring it market ready condition – full paint, new flooring and carpet, new kitchen including cabinets and granite countertops.
We believed the house on a ARV basis was worth $430,000, so our offer using repairs costs and 70% rule was $250,000. Let me break down this calculation:
· Offer calculation: ($430,000 – $76,571) * 0.7 (70%) = $247,400.30.
We happily lost that bidding. We did not buy the house as we were outbid by a significant portion from a winning bid of $305,000. A major difference of $55,000 between our bid and the winning bid. We strongly believe the “winners” of that wholesale deal at $305,000 are setup for a very poor risk to reward scenario on this investment if they are house flipping or even using as a rental property on a cap rate basis. It’s very likely that these investors are new and did not estimate the foundation and plumbing repairs factor properly in their ARV.
Why is it unfavorable risk to reward? Let’s further breakdown the ARV calculation. Using a project ARV sale price of $420,000, we assume for closing costs of 8% which includes realtor commissions, title, escrow fees, holding costs (utilities, property taxes, cleaning), etc which is $33,600. Then subtract out the estimated budget (if all goes correctly in the rehab) of $76,571 and the purchase price of $305,000. This brings in a projected net profit of only $4,829.
Calculation = $420,000 (ARV exit price) – $305,000 (entry purchase price) – $76,571 (renovation budget) – $33,600 (closing costs + commissions) = $4,829 profit.
Does only a $4,829 profit seem like a lucrative deal setup? I will let you answer that very basic real estate investing question.
Tools and Resources for Accurate Estimates of ARV
There are many resources to simplify the process of calculating ARV. First of all, most real estate or financial websites offer ARV calculators online. Real Estate Skills has a simple and free online calculator that helps investors quickly calculate ARV, maximum bid price and ROI.
Additionally, REI/kit offers an ARV calculator that will pull comps for the user. This calculator only allows limited free use, but the software can be purchased for unlimited, upgraded use.
The most useful assistant when determining ARV is a real estate agent. These real estate professionals, especially ones who specialize in working with investors, have the insider knowledge and training to most accurately calculate ARV, ROI and other investment formulas. They also have open and easy access to the tools that will generate the most accurate numbers, such as CMA software, MLS directories and market analysis tools used specifically for accurate estimates.
Partner with Bright Bid Homes to Find the Right Deals and ARV
ARV is one of the best tools in the real estate market. Investors use a property’s ARV estimates to predict their bottom line by determining the potential value and profits of a target property.
Without these calculations, valuable investments hinge on guesswork and thousands of dollars may be lost. It is essential to obtain the most accurate ARV calculations possible by performing due diligence in property inspections, comp analysis, market analysis and repair estimates.
These actions will reduce risks in real estate transactions and maximize profits. Finally, it is always best to search for the most reliable help and advice when speculating in real estate investments. Using reliable tools and consulting with professionals, such as real estate agents, will lead to the most success in real estate ventures.
If you do not already have a reliable partner to help calculate accurate and useful ARVs or a wholesaling company to find you good deals on houses to rehabilitate, then call us today!
We do this all day, every day! See our online reviews about how we would love to share our passion and knowledge with real estate investors who are looking for Texas investment properties.