Real Estate Deal Analysis & Advice

Why ARV Is the Most Important Number You Need to Know

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One of the best ways to make money in real estate is to add value to a distressed asset. This can take many different forms, but rehabbing a property is one of the main ways to increase a property’s value.

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That said, it's extremely important to be able to accurately measure what the future sales price is likely to be post-renovation in order to ensure a property will generate enough margin to be profitable. This is where ARV comes in.

What Is ARV?

ARV stands for after repair value. Simply put, what is the worth of a property after value is added?

If you’ve been on BiggerPockets for any amount of time, you’ve probably seen or heard the term thrown around quite a bit.

Weathered clapboard Cape Cod house with bay window and green shutters

Related: How to Determine a Property’s After Repair Value (ARV)

Why Is ARV Important?

ARV is important for a couple different reasons. Let’s dig into two of them.

1. Flipping Houses

The ARV is critical to your success if you're flipping a house. If you don't know the after repair value, then you probably shouldn't be flipping it in the first place. You need to know what the sale price of the property is before you even swing a hammer. We'll dig into an example later on.

2. Calculating Equity (a la BRRRR Strategy)

If you're rehabbing a property to keep as a buy and hold, it's still very important to know your ARV. Why? Because you'll want to know what your equity position is. This is critical if you plan to BRRRR the property—meaning buy, rehab, rent, refinance, repeat.

If you are buying in cash and plan to put a mortgage on the property after it’s stabilized, then your ARV is your best friend (or worst enemy). This helps you answer how much money will need to be left in the deal or how much money you can take out in order to move on to the next one. Just like the flip, we’ll offer up an example in a bit.

How Do You Calculate ARV?

So, how does an investor calculate an accurate ARV? There are a few ways to do this.

1. Use a Realtor

An experienced Realtor will have a good handle on values in a given market. Most will know a value just by glancing at a property. Just make sure they actually are experienced and have a good track record.

You can easily test them over the phone: “Hey, what did 123 Awesome Street sell for last month? That looks pretty close to the square footage and style that we’re looking to buy.”

talk-regularly-investors

Related: Flipping Houses: The 6 Most Important Calculations When Assessing a Fix & Flip

If they balk or aren’t familiar with the location or property, you can confidently move on to someone else.

When I was an agent, I was able to at least give a solid estimate of properties in our town based on the street or neighborhood. A good agent will know what houses are selling for, especially on a square footage basis.

Realtors can also give you comps, also known as comparables, which is really helpful. This way you can see pictures of sold properties, descriptions, price per square foot, etc., enabling you to compare apples to apples as much as possible.

2. Use the Internet

As you’re probably aware, you can find data on the internet. Lots of data. Sites like Zillow, Redfin, Realtor.com, and more have thousands of sales in their databases. It’s not that hard to get your own comparable properties online and do the homework yourself.

3. Dispassionately Calculate the Data

Everyone wants to reach for the moon when it comes to their own valuations. Don’t do that. Be as unemotional as possible when looking at the data. This can save you from buying a bad deal and help you get the most possible in a good one.

Evaluate the properties in question and see why they sold. Was it the location? The amenities? The school district? All of the above? When you’re planning out your rehab (or even just the purchase), keep these things in mind.

How to Protect Yourself From a Bad ARV

A misguided ARV will sink you. Whether it’s a flip or a rental, if you’re off on this number, it’s going to hurt. So, how do you protect yourself from a bad ARV?

Aside from following the tips outlined above, make sure that you’re not overvaluing your rehab. Many real estate investors make this mistake.

“But it’s brand new! A complete gut!”

That doesn’t matter as much as you think. When it comes down to it, a buyer is usually going to finance a property and that means the bank will require an appraisal.

buy-and-hold-mistakes

Why Appraisals Matter

When calculating what properties are worth, it's prudent to evaluate it from the perspective of a real estate appraiser. They are the gatekeepers when it comes to getting a transaction pushed through. If a property value doesn't jive with the contract price, it can cause big problems—for both the buyer and the seller.

Especially on flips, it might be worth hiring an independent appraiser prior to selling (or even rehabbing) to get a realistic value of the ARV. Of course, appraisers have also been known to make mistakes, so take everything with a grain of salt.

This can be a powerful sales weapon for you though. If you’re thinking of pricing the property at $250,000 and the appraiser says it will be worth $260,000, your marketing campaign just got a gift. You can market it at $250,000 and say it’s priced $10,000 under appraised value. Buyers love a deal.

Double-check Your Agent’s Work

Make sure you don't accept your Realtor's ARV at face value. Do your own due diligence. They can be wrong too (valuing under or over), so make sure you're looking at their guidance with a critical eye.

Examples of How NOT to Calculate ARV

Miscalculating ARV on My First Flip

I was an agent at the time. I found a foreclosure and purchased it for $115,000. It needed a $65,000 rehab. Given the neighborhood, I thought I could fetch $235,000 for the house after we were finished. I was fairly close to that number, and we went under contract with a buyer for $230,000.

Things were looking good until the appraisal was done. It came in a whopping $30,000 under the contracted price. This meant that if we accepted the appraisal, it would wipe out most—if not all—of our profit.

real_estate_math

Related: DIY Appraisal: How to Choose the Best Comps

We contested the appraisal and asked for a new one. No luck.

We ended up renegotiating with the buyers and settled on a price far below what was contracted but more than what the appraisal came in at. At the end of the day, we made money. But it was certainly a challenging first flip!

Miscalculating ARV on My First Rental

This was an auction property I bought with my buddy (and business partner). Our intent was to employ the BRRRR method so we could move our funds on to the next property as quickly as possible. I was planning on an ARV around $145,000-$150,000.

We bought it for $62,000, rehabbed it for $62,000, and it appraised for $150,000. This was obviously not a perfect BRRRR, but it did set us up for success as we purchased more rentals over the next few years.

ARV During a recession

Since it seems we’re heading toward a recession, there are a couple tricky aspects when it comes to calculating after repair value.

Values Going Down

When values are heading south, it makes the ARV process a little more difficult—but not impossible. Keep an eye on the trends in your market and adjust accordingly. The upside is that you probably got a better deal on the property and when you’re finished with the rehab, you’ll be in a better position to sell or rent.

Buyers and renters will acquire a nicely finished home much more quickly, and you’ll be able to sell for more money than almost everything else on the market.

Days on Market Going Up

During recessions, demand for certain properties can drop, meaning more time on the market and downward pressure on prices. As long as you’re aware of this and have multiple exit strategies, you’ll be able to plan accordingly.

How do you calculate ARV? What tips/advice can you offer other investors? What missteps have you made?

Share below!

Nate Shields is a real estate investor and real estate investing coach. He started in real estate in 2013 part-time as an agent and quickly went full-time, enabling him to quit his 9-5. In just two and a half years, he and his partner had 25 units in three states (a mix of single family, small multifamily, and larger multifamily). Nate also started flipping properties on the side.
    Terrell Murray from DelMarVa
    Replied 8 months ago
    Thanks, Nate Shields, I appreciate the way you have simplified and broken the term ARV down for a beginner like myself. ARV is an extremely important number to get right as an investor.
    Nate Shields Rental Property Investor from Madison, WI
    Replied 8 months ago
    Thanks for reading Terrell!
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied 8 months ago
    I like it, Nate. I use a lot of these same processes estimating FMV at the buy. The more moving parts involved, the harder a future value is to predict. Knowing what the thing is worth today vs what Im gettimg ot for drives my decision more than an estimated future ARV, personally, but your steps and factors to consider are great!
    Terrell Murray from DelMarVa
    Replied 8 months ago
    Hi Steve, How does FMV differ from ARV, I've been under the impression they were kinda the same...?
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied 8 months ago
    FMV to me is more of a BRV, before repair value. I think more focus should be put on what you are paying as-is today vs what its worth today but I think I'm in the minority. I need equity capture at the buy.
    Nate Shields Rental Property Investor from Madison, WI
    Replied 8 months ago
    Like that perspective Steve!
    Nancy Roth Investor from Washington, Washington D.C.
    Replied 8 months ago
    Not everyone considers the angle of ARV from the viewpoint of the rental property investor, thank you for that. I only differ with your last section, where you seem to assume that today's recession will mimic that of 2008-2010. Respectfully, I don't agree. Housing is not at the center of this one, and just before the economy keeled over, housing was in short supply and in great demand all over the country. Nothing about that has changed, as far as I've heard. In my hometown of Washington DC, values have not gone down at all. If anything, we have pent-up demand because so many springtime sellers yanked their listings in the midst of the virus lockdown. So sale prices are coming in at the asking price, or even bid up. This recession will be uneven and regional, and will depend heavily on the health of underlying regional economy before the crash.
    Nate Shields Rental Property Investor from Madison, WI
    Replied 8 months ago
    Thanks for your perspective Nancy. It will be interesting to see how this plays out over the next one to two years for sure.
    Greg K. Rental Property Investor from Boston, MA
    Replied 8 months ago
    Great article! I BRRRR condos and those are typically “cookie cutter comps” so the ARV is easy. Reading an appraiser’s report has helped me make smarter decisions with my investments. New investors might be surprised that finishes don’t matter to an appraiser. Two condos in the same complex with same beds, baths, square footage. Theirs has hardwood, mine has carpet, no adjustment. Theirs has granite countertop, mine has Formica, no adjustment. Theirs has white appliances, mine has SS, no adjustment. Theirs has fireplace, mine doesn’t, mine is adjusted -$1000. Finishes might impact market rent but not significantly. Stainless steel is easy to justify but LVT is harder when it costs a few hundred to clean a carpet, especially if you’re looking to BRRRR and just refi based on the appraisal.
    Nate Shields Rental Property Investor from Madison, WI
    Replied 8 months ago
    Greg, way to go for reading those appraisal reports. You are correct. They don't care about finishes! Good for investors to know.
    David Ziccardi Appraiser from Bensalem, PA
    Replied 8 months ago
    Greg, finishes absolutely matter to an appraiser. It's possible that your appraiser didn't observe any reaction to those differences in your particular market. Remember, cost does not necessarily equal value. An appraiser should be noting the differences between the units as you described and an explanation as to why adjustments were or weren't made should accompany those notes in their report. Regardless, good on you for reading your appraisal report thoroughly and understanding your market!
    Brian Stammler
    Replied 8 months ago
    Thank for the info Greg. I'm still in the learning phase, hoping to pull the trigger on my first BRRRR late this year/early next year. I didn't know that, at least in the condo area, so many of the elements you named would not have any relevance to the appraiser. What are some of the things you CAN do in these situations to make it stand out to the appraiser... or increase your ARV?
    Timias Woods Rental Property Investor from Los Angeles, CA
    Replied 8 months ago
    Nate, thanks for some of the tips you provided. As a newer investor, it’s definitely key to hone in on a conservative ARV that provides exit strategy flexibility.
    Nate Shields Rental Property Investor from Madison, WI
    Replied 8 months ago
    You are welcome Timias. Good luck on your investing journey!
    Corbin Jones Rental Property Investor from Joplin, MO
    Replied 7 months ago
    Nate, thank you very much for this article! How much were you able to pull out during the refi of your first rental?
    Nate Shields Rental Property Investor from Madison, WI
    Replied 7 months ago
    Thanks Corbin! Roughly speaking, we were all in for $122,000, the ARV was $150,000 and our lender required us to keep 30% in the deal when we did the cash out refinance. I think our original note on the property was $105,000.
    EMMANNUEL CHRISTOPHER from MERRILLVILLE, IN
    Replied 7 months ago
    Sometimes, the upgrades help you to command a higher rent. It also makes renters compete for your rental, and stay longer vs other plain Jane rentals.
    Nate Shields Rental Property Investor from Madison, WI
    Replied 7 months ago
    I totally agree Emmannuel. Nicer finishes may help you get better tenants and higher rent.