When real estate investors are analyzing a deal, one of the numbers they will always figure out is the ARV, or After Repaired Value.
Knowing this number, along with the amount of repairs needed, will help a real estate investor come up with their offer. You can think of the ARV as the price someone could list the property for on MLS, if it was move-in ready and didn’t need any repairs.
It’s top dollar.
Depending on the market and the particular business model of the investor, our offer is a certain percentage less than ARV, or the top dollar value. We also take into consideration repairs needed on the property. Real estate investors typically purchase property that need at least a small amount of repair work, but many times the property needs $20-50k in repair work.
After the investor comes up with the ARV of the property, they deduct the 20-50% typically to allow for profit and THEN deduct the repairs needed.
20-50% is broad but in a tight market, some investors are doing thin deals of only 20% discount which can be risky when rehabbing. If you calculate anything wrong (repairs, ARV, etc), you’re putting yourself in a position to potentially lose money. In a down market where lots of people are in distressed situations and are desperate to sell their property quickly, you can buy some properties at 50% off and sometimes even more. This doesn’t happen too often right now though.
So how does one come up with an ARV for a property? It’s best to compare the property to others nearby who sold very recently, are very similar in specifications, and have been rehabbed. You want to compare a 3 bed, 2 bath, 2000 sf home to another property, preferably in the same neighborhood that is also a 3 bed, 2 bath, 2000 sf property.
Let’s do an example.
You are going on an appointment in a neighborhood of homes built in the 1970’s. Many have been updated in the last 10 years but some still have the original appliances and flooring.
The property you’re looking at is a 1 story, 3 bedroom, 2.5 bath, 2-car garage house that’s 2,100 square feet and was built in 1972, and needs everything repaired and updated.
Below are properties that sold recently in the area. For our example, we’ll note that all of the below have been rehabbed in recent years.
- 1 story, 3 bedroom, 2.5 bath, 2-car garage, 2,000 sf, built in 1972, $200,000 sold price 3-months ago
- 1 story, 3 bedroom, 2.5 bath, 2-car garage, 2,200 sf, built in 1971, $225,000 sold price 1-month ago
- 1 story, 5 bedroom, 3.5 bath, 2-car garage, 3,429 sf, built in 1983, $335,000 sold price 8-months ago
Hopefully, it is pretty obvious, but the first 2 properties would be the best to compare to the property you’re evaluating. You could assume based on the comps that the property you’re looking at can sell at around $212,500, once repaired. This is your ARV.
Many investors purchase at 70% of ARV, minus repairs. 70% of $212,500 is $148,750. You’ll deduct repairs from $148,750 in order to get your offer. If there’s $25,000 in repairs, your highest offer should be $123,750.
This number might shock some homeowners, but it’s important for you to have a conversation with them about the amount of work needed to get the property move-in ready and how much time and money it could potentially take if they were to do it themselves.
Sometimes, homeowners think their house is worth above and beyond the ARV, even though it needs repairs. Kindly show them the data about houses in the area that were sold recently that were similar to theirs.
Get to your appointments early, drive around the neighborhood to get a better understanding of the comps, and know your numbers before you walk in. This allows you to focus on the seller and their needs.