What’s ARV in real estate, and how is it calculated?

After-repair value (ARV) estimates are one of the most critical calculations for property flipping and renovation projects, and many real estate investors rely on them to make wise investment decisions. Whether you're a first-time investor or considering your next flip, knowing what ARV is helps you accurately determine a property's potential value and can make the difference between a profitable venture and a costly mistake.

In this guide, we’ll break down common ARV calculation methods and provide some examples of how to calculate ARV on a property.

What’s ARV in real estate?

ARV estimates the market value of a property once you complete all planned renovations and improvements. Real estate investors use this figure to evaluate whether a potential investment property will generate enough profit to justify the purchase price and renovation costs.

ARV is the foundation for most house flipping strategies because it helps investors determine the maximum amount they should pay for a distressed property. Suppose you calculate that a home will be worth $300,000 after repairs. In that case, you can work backward to determine how much to offer, considering renovation costs, carrying expenses, and your desired profit margin. This way, you won’t overpay for properties that won't generate adequate returns.

Understanding ARV becomes particularly valuable when seeking financing for investment properties. Lenders often consider the after-repair value when approving loans for fix-and-flip projects or determining loan-to-value ratios. 

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Calculating ARV in 4 steps

Calculating ARV requires a systematic approach that combines market research, professional assessments, and cost estimation. The process involves four key steps that ensure your valuation reflects a realistic outcome, considering your renovations. 

1. Compare other properties

Start by researching comparable sales, or "comps," preferably in the same neighborhood. For a more accurate comp, look for recently sold properties that share similar characteristics with your target property after renovations. Focus on homes with the same number of bedrooms and bathrooms, similar square footage, comparable lot sizes, and those sold within the last three to six months.

When analyzing comps, consider the condition and features of the sold properties, and only compare renovated homes to other updated properties rather than homes in their original condition. 

2. Appraise the property

Hire a licensed appraiser to provide a professional opinion of the property's value after planned improvements. Appraisers use their expertise and access to comprehensive market data to provide accurate valuations.

The appraiser will review your renovation plans and specifications to determine the scope of your improvements. Based on their knowledge of buyer preferences and market conditions in your area, they'll estimate how these factors will help or hurt the property's market value.

3. Estimate the value of repairs

Create a detailed list of all planned renovations and get accurate cost estimates from qualified contractors. Your estimated repair should include materials and labor costs and a contingency buffer for unexpected issues that may arise during renovations.

Break down your renovation costs by category, such as kitchen updates, bathroom remodels, flooring, exterior improvements, and mechanical systems. Getting multiple quotes puts your estimates in perspective and lets you find potential cost savings without compromising quality.

4. Account for market conditions

Consider current market trends and economic factors that affect property values when your renovation is complete. Real estate markets can shift rapidly, so factor in seasonal variations, local economic conditions, and market trends that might impact your final sale price.

How to calculate ARV on a property

Let's consider a practical example: Imagine you're considering a three-bedroom, two-bathroom house that needs updates. To calculate the ARV, you should:

• Research comparable sales: For example, if your research shows that similar renovated homes in the neighborhood have sold for between $275,000 and $295,000, the average sale price of these similar homes comes to $285,000.

• Get professional confirmation: Hire an appraiser who confirms this estimate while considering the property's location and lot size.

• Calculate renovation costs: After your estimate, factor in your renovation costs. Let’s say you calculate that your total renovation will cost $75,000. After adding your estimated 10% contingency fund of $7,500, your total expected investment is $82,500.

After this process, you’ll be ready to apply the 70% rule.

The 70% rule in real estate

This rule provides a quick method for evaluating potential flip properties using ARV calculations. According to the ARV formula guidelines, investors should pay no more than 70% of the after-repair value minus estimated renovation costs. The 30% buffer accounts for holding costs, selling expenses, unexpected repairs, and profit margin. The formula looks like this: 

Maximum purchase price = (ARV × 0.70) - renovation costs

Using our previous example with an ARV of $285,000 and renovation costs of $82,500, the maximum purchase price would be: 

Maximum purchase price = ($285,000 × 0.70) - $82,500 

Maximum purchase price = $199,500 - $82,500 

Maximum purchase price = $117,000 

While the 70% rule provides a starting point, many investors adjust this percentage based on local market conditions, experience level, and risk tolerance. Investors might accept lower margins in competitive markets, while beginners prefer more conservative approaches that provide larger safety cushions.

Using ARV in house flipping

House flippers rely heavily on ARV to structure profitable deals and make quick investment decisions. The after-repair value helps investors determine their maximum purchase price while ensuring they profit enough for the time, effort, and risk involved in flipping properties. Successful flippers use ARV to evaluate multiple properties quickly, comparing potential returns across different investment opportunities. 

ARV also guides renovation decisions during the flipping process. Investors can prioritize improvements that add the most value relative to their cost, maximizing the final sale price while controlling expenses. Understanding which renovations provide the best return on investment allows flippers to allocate their budgets and avoid over-improving properties for their target market. Interest rate calculations also help determine carrying costs during the renovation period.

Tips and considerations for using ARV

Before you set your ARV in stone, keep these tips in mind.

Consider market fluctuation

Economic conditions, interest rate changes, and local market dynamics can all impact property values. Research market trends and consider various scenarios that could affect your final sale price to build flexibility into your ARV calculations.

Prepare for hidden damages

Renovation projects can uncover unexpected issues not apparent during the initial property inspection. Things like foundation problems, electrical issues, plumbing complications, and structural damage will all increase your renovation budget. Always include a contingency fund in your calculations to account for these potential surprises.

Renovation value varies by perspective

Buyers value renovations differently; not all improvements add equal value to a property's market price. Focus on renovations that appeal to your target market's broadest range of potential buyers. Kitchen and bathroom updates typically provide strong returns, while highly personalized improvements like a new shag carpet in the basement may not add enough value to warrant the upgrades.

Location impacts ARV accuracy

The accuracy of your ARV calculation depends on having comparable sales data in the immediate area. Properties in unique locations or markets with limited recent sales can be more challenging to value accurately. Consider expanding your search radius or consulting with local real estate professionals who understand the specific market.

Professional guidance improves accuracy

Working with experienced appraisers, real estate agents familiar with investment properties, and contractors who understand market preferences can improve your ARV calculations. These professionals bring market knowledge and experience to help you avoid miscalculations and identify opportunities you might otherwise miss.

Ready to use ARV in your next property deal?

With ARV home calculations, you gain a powerful tool for maximizing investment opportunities and structuring profitable deals. By systematically researching comparable sales, obtaining professional appraisals, and accounting for market conditions, you can make informed decisions that maximize your returns while minimizing risks.

Once you've completed renovations and increased your property's value, Better's streamlined cash-out refinancing process can help you access the equity you've built, providing capital quickly for your next investment opportunity.

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