Learning how to accurately determine the after-repair value is an underrated skill that is essential to a successful and profitable sale. If you are looking to purchase, repair, and sell properties on a shorter timeline, then this skill is even more imperative to your success. Even if you’re just wholesaling pre-vacant and pre-probate as shown in our Pre-Vacant Goldmine Training Program, you’re still going to need how to accurately determine the true market value of a house, plus know how to basic repair estimates.The after-repair value is a measure for the type of profit you are looking at once the house is completely ready for sale. There are a variety of factors that go into using the formula for ARV that will get you an accurate estimate. Underestimating the factors that manipulate theses values can be disastrous and will lose you money. When you estimate what you can make off of a purchase and repair property, you ensure that your investment is worthwhile.
What is After Repair Value?
The after-repair value is an estimate of the impending value of a currently damaged property after it has had the necessary repairs to transform it into a repaired house that is ready to sell. This value consists of the purchase price you will be paying for the home and the price of the repairs that are necessary to make the house desirable when placed on the market. There is a formula to determine the after-repair value of a property that many novice investors do not use because they look for an agent to give them an estimate on the property. You should determine the after-repair value yourself, as opposed to relying on an agent, because it will make you a more skilled professional and you will care a lot more about this vital calculation than an individual who isn’t trying to sell this property.
Factors to Account for When Picking a Comparable Property and Subject
Depending on your investing experience and your familiarity in the location of the property you are trying to determine the ARV for, this estimate you make may be enough for you to make your decision. If you are new to working in this area or are just starting off in your career a second opinion on the after-repair value is important to get before you make a decision on your ability to profit off of this property. If you are relying on an agent for this value, you should learn how to calculate it yourself because it is vital to being successful in your field. Learning how to make this calculation can save you money in the long run.
Finding your property and comparable properties in the neighborhood is an essential part of determining the after-repair value. The best way to find comparable properties (often referred to as comps) is through a multi-listing service that allows you to filter properties as you see fit. A real-estate agent can typically help you with their access to an MLS, but you can also use Zillow if you keep in mind that it won’t be as up to date since information goes to a multi-listing service before going to a public website.
When you are looking through comparable properties you will want them to be the most like your subject property with features and square footage, especially if you are new to the area and need help getting a ballpark price. Not only do your comparable properties need to have similar features but they should be very close by the property you are trying to estimate the after-repair value for. Keep in mind that when wholesaling pre-vacant and pre-probate properties, many of them will have a significant amount of repair estimates which need to be factored into your values. We recommend that you stay no more than a mile from the subject property when viewing similar comps that don’t have large acreage since location is an essential factor in realty.
Examining how long competitor properties have been on the market can also help you in calculating the after-repair value of your property. If a comp almost identical to your property sold after three days on the market but another similar property hasn’t sold after two-hundred days, there is a good chance the one on the market for the longer time hasn’t been properly priced and that is what is holding up the sale. Looking at sold, pending, and active comps is a vital factor in determining ARV. Sold comps that are within a mile of your property with similar features should be a determinant factor on whether you purchase the property you are looking at for repairs or not.
If you can’t find three or more comps that have sold that are extraordinarily like your desired property you may want to reconsider purchasing it since we find that there isn’t enough activity to invest in that location at this time. Any pending comps currently will be sold by the time you get your subject back on the market which are also useful indicators of sales activity. Active comps are important because they are what you are competing with, examining how long they’re taking to sell will allow you to determine the ARV better to ensure a quicker transaction.
Calculate the ARV of Your Property
Now that we discussed some of the important factors to consider when selecting a subject property and competitor properties we will discuss how to get the after-repair value of the subject property. Remember that you need to be confident that this investment is going to be profitable for you in the long run, you do not want to repair something that will not sell.
The formula you can use to calculate ARV is as follows:
ARV = (Property’s Purchase Price) + (Renovation Value)
We will go through the steps of determining the ARV, it is important for you to refer to all the factors we mentioned above that helped you determine whether to invest in this property. Using the ARV formula successfully allows you to forego paying for a costly appraisal.
Step One: Determine the Current Value of the Subject Property
To determine the properties as-is value without contacting a professional appraiser you should gather all the information you can about this property. Using the MLS, as we discussed earlier or gather information about:
- The subject property’s structure
The structure of the subject property refers to its size, typically you can find square footage online without any hassle. Number of stories and style of the home can be evident from viewing photos but printing out a sheet of what you need to know about the structure and going to visit the listing is always the best way to gather all of the structural information on the house you are interested in repairing.
- The subject property’s lot
You probably know by now that the lot where a property sits on is a large determinant in how much value the subject has. If the property sits on a corner lot, it will be priced differently than an interior lot. The shape, slope, and terrain of the lot will cause costs to vary with landscaping, hazards, and space. Accessibility to roads or the view in front or and behind the lot will also be a larger determinate for price.
- The subject property’s location
Location is supremely important to the value a property carries with it, if the neighborhood is an up and coming area it will be more expensive than a run-down neighborhood. If there are shopping centers and recreation within aa few miles this property will carry more value with it than an identical listing in the middle of nowhere. Finally living near a main road is more disable than living far off the beaten path.
Step Two: Determine the Repair Cost and Repair Value
Since your ARV is the combination of the purchase price and repair cost estimating the repair values accurately is essential to making a profit.
- Determining Repair Costs
When you estimate the repair costs it is important to make sure all bases are covered, and you may have to call in other professionals to give you a quote on what needs to be done if you don’t have the knowledge yet to carry this process out yourself. This determines your repair budget and will decide your profits on the project.
- Determining Repair Value
The important part to keep in mind when you buy a property to repair then sell is profits. Of course, if you pay $125,000 for the subject and pay $25,000 for repairs you won’t be selling it for the $150,000 you paid in, because that leaves you with no profit. Your repair costs may be $25,000 but if you are looking to make money (which you are) then your repair value needs to be well above that price.
Step Three: Pick Your Comparable Properties Wisely
The ARV you have now calculated is vital for the process of selecting your comps which as we discussed earlier need to be in the same location, recently sold, and similar in structure and features. You will want the ARV to be in line with the listing price of other comps, if it isn’t then you could lose money, hardly profit, or sit on the market for years on end. Making a chart to compare and analyze properties can be helpful, due so by using the steps below:
- Select three or more comparable properties and in the first column of your chart write subject, property one, property two, and so on.
- Each row should list the property’s square footage, bedrooms, bathrooms, conditions and price.
- Go through your table and select the best of each property per category, best condition, best price, and so on.
- Determine the list price of your subject by using these better and worse comparisons and their prices.
Your ARV should be on par with other comparable properties list prices. You never want to lose money on a deal so ensuring you have a good margin of safety to avoid financial loss even when potential issues arise is key. If you use the formula for ARV above and take all the previously discussed factors into account, then you should have a profitable experience.
The 70% After Repair Value Formula
To ensure you make money off the fix-and-flip process when dealing with pre-probate properties, you can use this simple formula that includes ARV and repair costs to prevent loss of money. This formula will cap the bid price to 70% of your sale price giving a good buffer for any issues like higher holding costs that may surprise you.
The 70% After Repair Value Formula is shown below:
MAXIMUM BID PRICE = (ARV x 70%) – Estimated Repair Costs
Spending any amount of money above the maximum bid price puts you in a tricky position where if you aren’t careful you will lose money on your investment. Since losing money is not profitable employing this technique is a safeguard. The best business model is the one that is safe and allows you to maximize profits.
The most sure-fire way to determine the future value of a project like this is to determine the after-repair value as accurately as possible. This calculation is one every serious real-estate investor should learn because it is vital to your success and can be both expensive and risky when you assign this job to someone else. Though conducting the proper data research is time consuming it is the only way you can be sure your investment will bring profit. When you are just starting out with ARV calculations seeking assistance from other professionals and getting a second opinion will be worth the extra money to prevent costly miscalculations. We hope that this guide has made you understand the importance of proper ARV calculations and given you a good baseline of information that will help get you started.