After Repair Value: What Is It?

by Rick Dearr, Senior Real Estate Adviser

Investing in real estate means understanding the different formulas that go into calculating a property’s value. One of the most useful tools is the After Repair Value or ARV of a property. This is usually an estimated value based on what the property will be worth once repairs and improvements are made. Knowing this value will help identify whether or not a deal is worth pursuing. The After Repair Value formula is especially important to real estate investors that are interested in fix and flips because it will help determine the best profit margins after the repairs are completed.

So how do we determine what the After Repair Value will be?

1. Determine the Current Value of the Property
2. Estimate Repair Costs and Repair Values
3. Research Similar Properties in the Area

after repair value

1. Determine the Current Value of the Property

To calculate the current value of a property, hiring a local appraiser is a good start. The benefit of hiring an appraiser is they know how to evaluate defects in a property. Once you know the property’s current value, you will have a foundation for your investment.

2. Estimate Repair Costs and Repair Value

The cost of repairs is easily the most crucial aspect of successfully flipping a property. Many investors make the mistake of over-rehabbing, thereby reducing their profits on their investment. To avoid this, start by looking at comparable listings in the area. Does every property listing show granite countertops and new floors? If so, those repairs are beneficial to the value of the property.

3. Research Similar Properties in the Area

To determine the ARV, we recommend starting with researching what other homes in the area have sold for in the last six months. Finding similarities like the same number of bedrooms, bathrooms, and square footage can help narrow down the estimate. You can do this while you’re researching comparable listings for repair trends and see what the resale value of the property is once the repairs are finished.

Now that we have calculated all of these values. It’s time to use the After Repair Value Formula:
(Current Value) + (Repair Value) = After Repair Value

I use a spreadsheet that I share with my students that quickly determines if there is profit in the deal. We put in the ARV, and the rehab dollars we expect to spend on the subject property and some other factors for holding costs and then we can change the offer price to see how it affects the profit for that home.

If our ARV is too high, we will end up offering too much for the home in its current condition. If it is too low, we will likely offer to little and the offer will not be accepted. So it’s important to have the correct ARV amount. There are some differences that a location can make when you are looking at comps that you should take into consideration. Even if a property is within a half-mile radius, is it really in the same neighborhood? We want to compare what our house can really sell for not just a number that makes us want to make the offer.