After-repair value (ARV) is an estimate of the value of a property after it’s repaired. This serves as a proxy for the market value of the price.
The most common use of ARV is in house flipping, when an investor buys a distressed house, fixes it up then sells it, typically within a year.
Calculating after-repair value
ARV is the sum of the purchase price plus the value of the renovations.
If the property hasn’t traded recently, an appraiser can still estimate a market value by benchmarking it against peers with similar locations, structures and lot characteristics.
The value of the renovations is a little trickier. First, let’s be clear that the goal is to calculate the value, not cost. Adding just the cost of the repairs yields the fix-and-flip value.
Suppose that investors buy a property for $150,000, knowing that it needs $25,000 in new appliances and bath fixtures. They have a potential buyer who expressed interest in paying $200,000 for the property once it’s renovated. In this case, $175,000 is the fix-and-flip value, $200,000 is the ARV, and $25,000 is the expected profit.
Still, calculating ARV involves some guesswork, which often means some wishful thinking. Experts generally caution new investors to assume that they won’t get their full anticipated ARV. For this reason, they should lower their maximum bid on the property’s as-is purchase price.
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