You can’t invest in a property if you don’t know how much it’s worth. When you’re a real estate investor who often deals with distressed properties, the amount you pay for a home is almost never its actual value. If you’re going to build a profitable real estate business, you need a way to find out what you can sell a property for after you renovate it.
The number you need is called the after repair value, and it’s central to profitable real estate deals. While determining what a property is worth may seem like a difficult task at first, there are several tools and formulas you can use to get your numbers right.
What is after repair value and why does it matter?
After repair value (ARV) is the amount a property will be worth after you renovate it, fix any damage inside and outside, and clean up its yard. There are several factors that determine a property’s ARV, but the main ones are the age of the house and the condition of its surrounding town or neighborhood.
ARV is important because it tells you a lot about a deal. Not all damaged houses will make good investments, even if you can buy them for a low price. Therefore, the ARV tells you more than a property’s value; it also tells you whether or not it’s worth pursuing.
How to calculate ARV
While it may seem complicated to calculate how much a property is worth after renovations and repairs, there are formulas that make it a simple process. To use these formulas, you need a list of recently sold properties that are similar to your deal.
These recently sold houses are called comparable properties, or comps. They’re houses that have a similar square footage, bedroom and bathroom count, and lot size to your deal. Comps are also typically located within a few miles of your deal without crossing any major highways; railroad tracks; or state, county, and city lines. Investors use the average sale price of these properties to estimate how much their deals are worth.
Using comps and the ARV formula
Once you’ve found comps, you can use a simple formula to estimate a property’s value. The formula is:
Average Price Per Square Foot of Comps x Square Footage of Deal = ARV
How to find comps
Of course, finding these properties is the tricky part of a comp analysis. In the past, investors needed a real estate license to access the Multiple Listings Service (MLS) and find out the sale price of comparable properties.
The MLS is a gold mine of information about all properties listed, pending, and recently sold in a specific area. But this information is only available to licensed real estate agents. If you don’t have a real estate license, you’ll have to find your comps another way.
This was once a common dilemma for real estate investors. Now, some real estate lead generation platforms have bridged the gap and given investors access to MLS data in disclosure states and highly accurate estimates in non-disclosure states. With this data, investors don’t have to search for comps, because their software will find comps for them.
Real estate lead generation software with a great, built-in comparables tool will find comps for you and even use their sale prices to automatically estimate your deal’s ARV.
BatchLeads automatically locates comparable properties and calculates ARV
BatchLeads comp calculator lets you choose which properties to include in a comp analysis
The 70 percent rule
Calculating ARV is important, but it only tells you about a property’s potential value, not what you should offer for it. To determine your maximum purchase price, you need the 70 percent rule.
This is a crucial fix and flip concept that real estate investors follow to maximize their return on investment. It states that your maximum bidding price should almost never exceed 70 percent of a property’s ARV.
Following this rule allows investors to factor in estimated repair costs and renovation costs, while protecting themselves against unforeseen expenses related to fixing the house.
The 70 percent rule formula is:
(After Repair Value x 70%) – Repair Cost = Highest Offer Amount
Just remember that when you’re wholesaling, your cash buyer will probably use this same formula to determine how much they’re willing to pay for the deal. Ideally, your maximum bid should be well under 70 percent so that you can still sell the property and collect a large assignment fee for your efforts.
The after repair value is an essential estimate of your deal’s final sale value. If you plan to find consistent success in real estate investing, knowing how to calculate this number correctly will be crucial.
While finding comping information used to be a time-consuming task, real estate software like BatchLeads has made it significantly easier. With property details and MLS data at your fingertips, it’s much easier to confidently calculate ARV and make data-driven decisions.