Terminology Help

8 Replies

I am new to investing and doing wholesale deals and I keep seeing people talk about the ARV and the % ARV. I know that ARV stands for after repair value but I'm not really sure how people get the number and how they figure out the % of ARV when planning a deal. Can someone clarify how that works for me, I would greatly appreciate the knowledge.

I heard one time.

ARV minus rehab costs times .65

or offer price is 65% of (ARV-rehab cost)

The problem is that in a lot of flips the rehab cost ends up double what you estimated.

If ARV is, for example, $100K and you're buying it for $60K you're paying (60K/100K) = 60% of ARV. Its nothing more complicated than that.

What you might be thinking of is the 70% rule of thumb. Once you're determined the ARV for a property (which is not easy) then you would want your purchase price plus rehab costs (also hard to figure out) to be at most 70% of ARV. That assume you're using hard money and hold for about six months. That should result in a profit of around 15% of ARV. If you pay, say, 80% for purchase plus rehab, then your profit potential is reduced to about 5% of ARV.

You find the ARV by comparing prices on recently sold similar properties in the same area. The more technical term is Comparative Market Analysis, aka "comps".

Is that what you needed?

If your question was more about flipping, the percentage of ARV, then it's just that in order to make a profit you have to buy at a low enough price to afford to do the rehab , pay the holding and selling costs, and have enough left over to make it worthwhile. Many people use the formula of ARV x 70% minus rehab costs as a way of determining the maximum price they can pay for a successful flip.

@Jon Holdman  thank makes sense, I think I just need to get a deal under my belt to get a full grasp on it.  Thanks

@Jean Bolger  thanks, that was the question. I want to be confident in having that conversation with a buyer when I wholesale and be able to use it for exit strategy when I move into doing flips and buy and holds

@Lee Arnold - what you want to learn is MAO or Maximum Allowable Offer.

That is where a formula will come into play. 

@Steve Babiak  Haven't seen that one before. Is that a plan to limit the offer to get the best possible deal?

The big thing to keep in mind is that ARV is based on three values: Your acquisition cost, the repair costs, and the final sales price. The last two value are opinions, the costs of repairs and the value after the sale. both of these estimates could be way off, and in a bad way. Repairs could cost more money and take more time, and the sales price could be lower than expected (or your estimates too optimistic).

The first value, your cost to acquire the property, is the one you have the most control over. If your acquisition cost is high, don't fool yourself by convincing yourself that you can make it up with low repair costs and a higher sales price.

Todd

@Lee Arnold - since your profile photo has the Liberty Bell in it, I will write a line or two to point you on where to get more info :) Basically, MAO is the max price you can pay and still make the minimal amount of profit.

Here is a link that has a short discussion:

http://www.biggerpockets.com/forums/311/topics/120...

And don't be afraid to use the search function on BP; putting MAO in gets a bunch of links to read.

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