This is the estimated value of a property usually after renovation or after any improvement. In order for the ARV to be estimated, an appraiser needs to properly check the property both it’s before and after improvement value so that investors will have a full idea about the estate. ARV is very important for investors so as not to be in a deficit each time a sale is made on improved property. a good real estate investor is not one who will give the best estimate of a property, but one who will buy low and is capable of selling high, this aspect is highly supported when the investor is able to understand the ARV of a property.
Calculating ARV
If you don’t know how to access or estimate the ARV of property, probably you won’t invest for long.
It’s a very complicated estimate but however, the ARV will always have a compromise at:
ARV = Property’s Current Value + Value of Renovations
Where Property’s Current value is the value of the property before improvement
Value of Renovations is the total expenditure
Without using the formula above, there basically three approaches to estimating a property’s value
- Income Approach. This method is commonly used by owners whose property is used to generate income like the property rentals. Here the income of a property is assumed to be the value.
- Cost approach. Here the value of a property is assumed by the age and the amount to replace it.
- Sales Comparison Approach. This is the most widely used and accepted approach of the estimated value for the property. Here, the property is compared with past properties usually within the same vicinity is the value of the current property.
Sales Comparison Approach is the best approach so far and widely used to estimate the value of properties. To go about with calculation of ARV, an individual who is specialized in checking to the values of properties known as an appraiser will go and check the property’s before and after value, after the repair has been made, this will be based on list summited by Rehab Financial. As sited above, the formula of ARV used by the appraiser is given by:
ARV = Property’s Current Value + Value of Renovations
Here, the appraiser will add both the purchase price and the added value for the additional expense for renovation as previously described.
This is a very simple task when it is being handled by experienced real estate investors. This is because they know the area so well that they feel comfortable in given estimate and prediction about the values of properties because they have been working with such estate for a long time.
Real estate investors now use the most common and reliable method of ARV which is known as the 70% of ARV rule. Here, fix and flip investors will set up a maximum bid which will cover the unforeseen cost of renovation ad even at that a reasonable profit gain will be acquired
The formula for 70% of the ARV rule used by real estate investors is as follows:
Maximum Bid Price = (ARV x 70%) – Possible Repair Costs
As cited on the equation above, 70 percent rule means that the investor pays 70% of the ARV of the property minus the value of the expected repair.
