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Posting Date: 2023-02-14

What Is Property After Repair Value?

If you want to start real estate investing -- especially flipping houses -- after repair value (ARV) is one of the most important terms to know. So what is it exactly? 

What Is After Repair Value (ARV)?

After repair value (usually shortened to ARV) refers to a property’s estimated market value after it undergoes specific repairs and renovations. ARV is an essential factor for real estate investors who flip houses because it helps them determine the valuation of particular properties so they can maximize profitability and return on investment (ROI).

Understanding the ARV will help you as an investor to identify how much money you should invest in renovations and if the property is worth your investment. For example, if a house has a low fair market value and comparable housing in the area sells at a lower price point, investors can use the ARV to determine the profitability of their investment.

The ARV formula in real estate investing

Most investors don't want to purchase a fixer-upper at market value. They want to purchase the property at a discount from its current value accounting for the repair cost.

The standard after repair value formula most wholesalers and rehabbers use to make offers is:

70% of the after repair value – repair cost = maximum offer price

For example, if a property has an after repair value of R2 500,000 and the estimated repair costs are R250 000, the investor would use the formula:

(R2 500 000 x 70%) (ARV) - R250 000 (estimated repair cost)

R1 500 000 (maximum offer price)

The maximum offer price is the most the investor should pay for the property, so most will start with a lower offer. The lower the purchase price, the more room for profit. While the 70% rule is a common standard in the industry, depending on the market, some rehabbers or wholesalers will go as far up as 75%–80% of ARV to have a competitive edge, although profit margins and risk will be greater if the percentage used is higher.

Having an accurate idea of estimated repair costs is essential to the success of using the ARV formula. Investors should account for every expense relating to the renovation of the property.

Knowing the actual value of a property is essential, no matter whether you’re a buy and hold investor keen on turnkey properties or a fix and flipper looking for homes in need of serious work. “Buy low, sell high” is real estate’s core success formula—but in order to buy low, you need to know how to evaluate high.