As any experienced real estate investor knows, accurately estimating the after repair value (ARV) for a fix & flip project is crucial to project success. Having an accurate ARV can not only give you a better picture of how much profit you can take away from the project, but it’s also the number that most private lenders use to determine the total amount that they’re willing to lend. If your estimate is too high, you’ll likely end up being disappointed at the end of the project, and may even lose money. If your ARV is too low, you could be missing out on an opportunity to maximize leverage on your investment. So, how exactly does one accurately estimate the ARV for a fix & flip?
Determine Your Scope of Work in Advance
A big factor that will determine the ARV of your property will be the amount of work that you put into repairs. With this in mind, it’s important to be familiar with how the work that you’re planning to do will add to the value of the finished project. For example, if you plan to spend $35,000 on structural repairs, you may add $40,000 of total value to the home just for making it habitable. But in some cases you may be able to make $15,000 worth of cosmetic updates that increase the value by $50,000 because homebuyers find the styles attractive and modern.
With a detailed plan of the work that will be done, you’ll be more easily able to calculate the ARV on any given property. Having this information readily available will also help you make your case with private lenders when negotiating terms of hard money loans.
View Comps in the Immediate Area
When your scope of work is built out, be sure to take a look at what comparable houses in the immediate local area are selling for. Ultimately you’ll be able to determine a range of prices based on property condition versus what those properties are selling for, and you should be able to determine where on the spectrum your finished product will fall. If even the most recently updated and modern home on the block just sold for $225,000, then it’s highly unlikely that you’ll be able to do something different to a similar home on the block to achieve a $300,000 ARV.
As we’ve learned in 2021, it’s not impossible for prices to surge over a 6-month period, but for the most part, it pays to lean towards the conservative side when estimating against comps.
Develop a Relationship with An Appraiser
This might seem like an obvious one, but one of the best things you can do to ensure your ARVs are accurate is to develop a relationship with a professional appraiser. Speaking with people whose job it is to determine home values will help you grow your own knowledge base and get more familiar with what appraisers are looking for. While you may have no desire to become a licensed appraiser yourself, knowing how to speak their language is helpful.
Always Remember the 70% Rule
When you do have an ARV worked out for a particular property, you can use this information to determine whether you’re purchasing at a good price point for healthy profits. Ideally, any property you purchase will be priced at 70% of the ARV minus construction costs. By default, this will build in a 30% profit margin on every project. While this isn’t always possible depending on market conditions, it is the standard that most real estate investors look to in order to ensure success in a fix & flip strategy.
For investors of all experience levels, calculating ARV can be tricky, especially in a hot housing market. But by following a few ground rules you should be able to get an accurate picture of what a property will appraise for once it’s been rehabilitated. If you’re ever unsure of what a fair ARV might look like, be sure to consult with real estate professionals before going all in on a project. The last thing anyone wants to happen is to end up with a project that loses money because of a lofty ARV that can’t actually be reached.