The ARV, or After Repair Value, is a figure used in the BRRR Method (Buy, Rehab, Rent, Refi) to determine the difference between the as-is price of the home and the value of the property after repairs. It is a critical number for real estate investors as loans are granted based on the loan-to-value derived from the ARV.
The after-repair value formula is:
ARV = Property’s Current Value + Value of Renovations
To calculate the property’s current value, it is important to enlist the help of a professional appraiser as they have the expertise needed to identify any issues and “quirks” that could affect the property’s value.
Once you have the property’s value pinned down, you will need to estimate the costs of renovations. Keep in mind that the costs incurred to flip the house must be less than the value of the renovation so your investment will see positive returns. Here are some factors to consider:
- Size of space
Remodeling a guest bathroom will almost certainly be less costly than larger areas such as the master bedroom or the kitchen. Full kitchen remodeling projects are likely to run at least $50,000. To cut back on expenses, you may want to consider a partial renovation and avoid major structural changes such as knocking down walls and rearranging the layout.
- Property condition
Older houses will often require more maintenance and have underlying issues. An inspection report is key in ensuring that your fixer-upper does not turn out to be a money pit.
- Design and Materials
When it comes to pricing, cabinetry, flooring, and windows run the gamut. Choose finished materials that fit into your budget.
Get estimates from at least three contractors to zero in on an offer that combines both quality and fair price. Asking for specifics about the scope of work, such as itemized list of repairs, is a good idea.
When determining the maximum price you should consider paying for a property, many real estate investors abide by the 70% rule. Imagine the ARV for your property is $100,000, and it needs $25,000 in repairs, then the most you should pay for it is $45,000. Lenders often times rely on the ARV to determine how much money you can borrow.