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Everything You Need To Know About After-Repair Value (ARV)

What is ARV?

Regarding real estate investing, especially in house flipping, the term “After Repair Value” or ARV holds significant importance. But what exactly does ARV entail? In this article, we’ll delve into the depths of after-repair value, its calculation, its relevance to investment strategies, and the critical considerations when employing ARV as a tool in real estate decision-making.

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How to Calculate ARV

At its core, after-repair value (ARV) represents the projected value of a property after it has undergone improvements, renovations, or repairs. The calculation of ARV hinges on comparing the subject property to recently sold comparable properties, often called “comps,” which share similarities in terms of condition, age, size, construction, style, and location.

The ARV computation process entails selecting three to six comps sold within the past 90 days, ideally resembling the property. You can obtain an initial ARV estimate by averaging the sales prices of these comps. However, to further refine the forecast, a more meticulous approach involves calculating the average price per square foot and multiplying it by the subject property’s square footage.

The Significance of ARV in Investment Strategy

ARV emerges as a cornerstone in the investment strategies of house flippers and property investors. This estimation serves as a compass, directing them toward potential profit margins. A prominent technique employed in the industry is the “70% rule.” This rule suggests that an investor should offer 70% of the ARV minus estimated repair costs as the maximum purchase price. This formula allows investors to secure a property at a discount from its current value while accounting for repair expenses.

This methodology isn’t just about securing an offer; it extends its influence into financing. Lenders offering rehabilitation loans base the loan amount on a percentage of the ARV, demonstrating the intrinsic link between ARV, the loan amount, and the investor’s ability to decide about the property.

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Factors to Consider When Using ARV

While ARV is undoubtedly a powerful tool, it comes with nuances and potential pitfalls. The accuracy of ARV estimates can vary widely, primarily when relying on external sources. The precision of the method used to determine ARV and the reliability of selected comps are paramount. A mistake as simple as underestimating repair costs or using poorly matched comps can lead to a skewed ARV estimate, resulting in an overvalued or undervalued property.

Navigating these intricacies requires vigilance. When in doubt, investors can seek assistance from seasoned real estate professionals or obtain repair quotes to ensure the accuracy of their calculations. Developing proficiency in calculating ARV takes time and practice, allowing investors to refine their skills and make more accurate investment decisions.

Developing Proficiency in Calculating ARV

The road to mastery of ARV calculations involves dedication and practice. By consistently applying accurate ARV calculations, investors can hone their skills and gain confidence in making informed investment decisions. Learning from real estate professionals and mentors and engaging in hands-on experiences contribute significantly to developing a keen sense of ARV estimation.

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Conclusion

In real estate investing, understanding after-repair value (ARV) is akin to possessing a compass in a vast sea. ARV guides investors through the complexities of property valuation after improvements and repairs. We cannot overstate its significance in investment strategy, financing decisions, and risk management. By navigating the intricacies of ARV calculation and refining their skills, investors empower themselves to make informed choices and navigate the ever-evolving landscape of real estate investment.

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