When it comes to investing in real estate, it’s important to not only have a vision, but also an eye for potential. To that end, maximizing said potential means knowing what the home’s after repair value (ARV) is. It is ARV real estate, after all, that will typically identify whether or not a deal is worth pursuing. In the event the ARV justifies the purchase price and every impending cost, investors may find themselves one step closer to closing a deal. However, nobody is going to calculate the ARV real estate figures for you; you will need to know how to do it yourself, perhaps even using a few tips along the way.
ARV in real estate is short for after repair value, or the estimate of a property’s value after all repairs and upgrades are completed. This is a critical number for real estate investors because it calculates the margin between the “as-is” value of a desired investment property and the value on a developed property that has been completely renovated.
Once you know the value of the property, you can begin determining the expenses which will provide the best place to start. As a new investor, if you don’t know what the ARV real estate rule is for a potential property, you are simply guessing.
The after repair value will also define an investor’s exit strategy and reveal which real estate financing route is best. In essence, an ARV will provide investors with the best picture of what they can sell an investment property for.
Assessing the ARV of a property requires some ability to gather repair estimates with accuracy, including insight of the local market. Professional investors that are well-versed in the real estate investment game can easily walk into a property and assign a value based on their knowledge of the market within minutes. Unfortunately for beginners, that’s just not possible. If you need some help assessing value, the following will explain how to calculate the after repair value.
Annual Rental Value
Annual rental value is sometimes incorrectly confused with after repair value, though the two are completely different metrics. Annual rental value refers to the yearly cost for an occupied space. This does not necessarily equate to the annual rent of a property, but instead takes comparable properties and occupancy costs into account. Annual rent value is typically used when calculating the business costs associated with occupying a given space. In order to keep the two terms separate, it is important for investors to understand the difference between the two metrics. Each calculation can be helpful for your career as a real estate investor, so make sure you have a good understanding.
LTC In Real Estate
Commercial real estate investors will rely on a different formula to estimate their property’s potential profits: LTC. The loan-to-cost (LTC) ratio in real estate is typically used to compare financing with the total cost to build a property. LTC is most frequently used in commercial real estate construction as a way to evaluate the financing of a given property. By calculating LTC, commercial developers can assess the level of risk involved in a given project. This is yet another great calculation to add to your tool box as an investor.
ARV Calculator: How To Calculate After Repair Value
What is ARV in real estate, if not for a great way to analyze a deal’s potential? Therefore, if you want to analyze your next deal accurately, you should follow these steps:
Calculate Costs And Expenses
Obey The 70% Rule
The first step in determining the ARV of an investment property is analyzing the comparables, or “Comps” as they are commonly referred to as. These are either recently sold or up for sale homes that are similar to the investment at hand, and they are used to determine the value of a property. In essence, comparables provide an indication of what an investment will sell for.
To obtain detailed information on comparable properties, investors will want access to MLS, or Multiple Listing Service. This will provide the most details on a property that is up for sale or recently sold. Investors should also consider recently sold comps for bank-owned properties (REOs) and short-sales, depending on the amount of comparables found on MLS. Investors should pay special considerations to the following:
Homes sold within the last 90 to 120 days
Homes similar in age, size, square footage and room count
Homes in a similar neighborhood
Homes within one mile of the investment property
Investors should also consider current market conditions and trends, as well as seasonal price changes. This will enable investors to gain insight on both the resale value of a property as well as the optimal time of year to buy or sell.
The second part is determining the potential costs of repairs for an investment. This will help to determine how much you want to pay for a property. The following criteria will help investors:
Obtain estimates from three to five licensed contractors and make sure each repair estimate is clearly itemized. It’s also important to know the capabilities of your contractor to ensure quality work is being performed on the property, as well as on time and on budget.
Get material estimates and buy at discounts. I can’t recommend this aspect enough. As a beginner investor, remember to base your budget on your buyers as this will make certain that materials are purchased in an acceptable price range.
Investors will also need to consider additional costs such as closing costs, holding costs and financing costs. Every scenario is different depending on an investor’s exit strategy, but understanding the estimated property value is key.
For instance, many investors forget to consider holding costs when buying an investment property. Costs such as property taxes, insurance, utilities, maintenance and HOA fees add up. As an investor, you’ll want to be aware of these expenses and understand how much they add up to.
What Is The 70% Rule In Real Estate?
The 70% rule in real estate is a way to determine the correct purchase price for a rehab property. It is a real estate formula that compares the cost and profit margin of purchasing a distressed real estate property. This number will essentially tell an investor how much you can pay for a property by accounting for the ARV and estimated repair costs. To calculate the ARV, investors can follow this formula:
(Sale Price) + (Value of Repairs) = After Repair Value
After determining the ARV, investors can then use the 70 percent formula:
(ARV x .70) – Repair Cost = Maximum Purchase Price
The formula suggests that no purchase price should ever go over 70 percent of the future value of the property after repair costs are considered. It is a good rule of thumb because it allows investors to evaluate the potential profitability of a real estate investment. This can be used to help investors negotiate a better purchase price, and avoid any properties that may not have a high return on investment. The following example will provide more clarity:
Purchase Price: $200,000
Repair Value: $50,000
Repair Costs: $30,000
These variables suggest the ARV of the property will be $250,000. Therefore, the maximum purchase price of the property should be $145,000. Investors can use this information before making an offer to ensure they are getting the most out of a deal. While the 70 percent rule is not a necessity, it is a great way for investors to protect their bottom line and maximize overall profits.
After Repair Value Calculation Tips
Numbers hold the key to any successful rehab deal. The more accurate you are with your estimates, the higher your profits will be. One of the most important numbers you will estimate is the after repair value (ARV). This is the value that you think the property will be worth after you are done with your repairs and upgrades. If you overestimate this number, your property will sit on the market for a very long time. Again, the best investors can walk into a property and within minutes assign a value based on their knowledge of the market; if you are not there yet, here are a few tips to help in the process:
Get A Good Team In Place: Real estate investing requires a solid team around you. Even though you are the final decision maker, you should lean on the input of others. Your realtor and contractor are the two key team members that will help determine your ARV. This number starts with an estimation of the work needed and the costs associated. Even if you are a seasoned investor, a contractor will have a better idea of all the costs. Little things on rehab deals can quickly add up. Not everything that you do will give you equal value. A good contractor knows the best ways to stretch your dollar. Your realtor will tell you if your numbers are realistic. You don’t have to do everything yourself on your rehab. Start with getting a good team in place.
Review Multiple Estimates: If you have a solid relationship with a contractor, you are ahead of the game. Getting to this point usually takes time and several deals. If you don’t have a contractor on your team, you need to get a few different estimates. As a rule of thumb, you should nail down three good contractors and go from there. Once you go over three contractors, everyone will sound alike, and you will end up doing more harm than good. Be as open and honest with them as possible. Explain the deal and what you are looking for. Ask for written estimates detailing all the costs and work associated. This way you can compare apples to apples with other estimates. Price is important, but it may not be the most important thing. You want someone that will be at the house when they say they will. The longer it takes to finish the work the more your bottom line is reduced. After reviewing your estimates it will give you a good idea of your budget and an idea of the finished product. The finished product will lead to your value.
Know Your Market: Before you do any work it is important that you know your market. Knowledge of the market will give you a good idea of what work you should do. Not all improvements you do make sense for the neighborhood. Improvements in San Diego will differ from those in Birmingham. All buyers like nice things, but the market may not give you the return you are looking for. A pool that takes up half of the back yard may not be the best idea. You want to make your upgrades and finishes nice, but you need to make them in line with your market. A real estate agent will help narrow down a specific value. You need to have a basic idea of the neighborhood before you even make an offer. The market the property is located in is more important than the work you put in. If you don’t know your market, you will have a tough time determining the value.
Listen To Your Realtor: Even though you may have a good grasp of the market, your realtor has a better understand of local property values. Getting estimates and knowing your market is all done to determine the value. There is a lot that goes into this number. Going off of one sale a few streets over will not give you an accurate value. Your real estate agent will look at comparable sales that are similar to your property. They will look at past sales and current listings in the last 90 days within a mile of your property. This is the information that the people that will buy the property look at. You may do great work, but the numbers don’t lie. Your real estate agent will give you an honest assessment of where they think the value will be. In most cases, they will be right. If you ignore their advice and lean towards the high side of the market, you will end up disappointed.
A potential deal’s ARV has become an invaluable tool for today’s investors. In its simplest form the ARV of a home will play an integral role in deciding whether or not a deal is worth pursuing. To that end, every investor needs to know how to calculate ARV real estate, at least if they want to realize success.
Do you have a take on ARV? How do you use it in your business? Let us know in the comments below.