After Repair Value (ARV) Definition
What is After Repair Value (ARV)?
A property’s After Repair Value or ARV is a determination of what a property will be worth after it has been improved. As the name implies, is the value of the property after repairs.
ARV is an essential component of many different real estate investing strategies, but it is especially relevant for investors who buy distressed properties with the plan of improving them through “sweat equity” and re-selling them at a higher price in the future (e.g. – house flippers and rehabbers).
If a real estate investor fails to determine the correct after repair value of a property, they run the risk of underestimating the repair costs, buying at an amount that is too high, and ultimately losing money on the flip.
How To Calculate ARV
The conventional formula for calculating ARV looks like this:
Purchase Price + Value of Repairs and Improvements = After Repair Value (ARV)
It’s imperative to note one thing in this formula…
The cost of repairs and improvements is not the same as the value of repairs and improvements.
Regardless of how what an investor might spend to acquire and renovate a property, the total amount spent doesn’t directly correlate with how much the property will be able to sell for.
As an alternative, investors in this school of thought determine the after repair value by running a Comparable Market Analysis (CMA), also referred to as running comps.
Here is a tutorial on how to perform a CMA:
When an investor determines the ARV through a CMA the formula looks like this:
ARV = Average price per square foot of comparables x the total square footage of the subject property
The steps are as follows:
- Gather the following details about the subject property:
- Square footage
- Bed/bath ratio
- Style or structural layout (i.e. ranch-style, two-story, etc)
- Identify three-to-five other properties that match the following criteria:
- Properties that are in close proximity to the subject property (typically within a one-mile radius or less)
- Properties that have a similar style, square footage and bed/bath ratio to the subject property
- Properties that have recently sold (typically within the last six months to a year)
- Determine the average price per square foot for these three to five properties
- Multiply the average price per square foot by the total square footage of the subject property. This is the after repair value.
After repair value is essential in a number used by many real estate investors. It’s a crucial estimation of what an investor will be able to sell a property for in the future.