With house flipping, in order to ensure a property will maximize your profits once you resale it, you need to calculate its after repair value (ARV), which is simply an estimate of the distressed property’s value after renovations. This can be done using the following steps:
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Steps on How To Calculate ARV in Real Estate
Enlist the Aid of a Real Estate Appraiser to Help Determine the Current Value
To arrive at a property’s after repair value, you need to begin with an estimate of its current value, which a real estate appraiser can help you do.
Real estate appraisers are highly skilled at identifying issues with a property that can decrease its value and vice versa, so they can provide you with a pretty good estimate of what the property in question would be worth in today’s market.
Estimate the Value of the Renovations
Once you have an estimate of what the property is worth in its current condition, the next step is to roughly calculate the value of the renovations, including the labor costs, and more to help determine if the value of the upgrades will be lower than the final sale price.
One way this can be done is by obtaining an itemized list of estimates from at least 3 experienced contractors to see what costs they come up with.
There are also building material calculators available to help you calculate the material cost for the project.
Calculate the ARV Using Similar Properties
Finally, calculate the after repair value of the investment property by comparing your costs to similar properties within a one-mile radius of the subject building that have sold within the last 2 to 4 months or that are currently up for sale.
Be sure your comparables have the same characteristics, such as the same number of bedrooms, similar square footage, the same age, etc., to give you a more precise idea of what value to expect after your rehabilitation.
After you have determined the ARV in real estate using at least 3 comparable properties, according to the experts at DealMachine, “the next step is to calculate the maximum allowable offer that can be paid for the subject property using the 70% rule,” which can then be used to help you narrow down potential investment properties.
In the end, it is important to calculate the after repair value before renovating the property to ensure it matches your comp values, so you know ahead of time whether your investment property will make money.
Once you arrive at an ARV, you should also strive to complete your repairs and upgrades as quickly as possible because housing market conditions fluctuate, which can make property prices increase or decrease and thus affect your profits.
You should also understand that a tenant may see less value in the completed renovations than the investor, which can also affect the value of the investment and, in turn, also your projected after repair value.