If you’re planning to fix and flip properties, then it’s crucial that you’re able to figure out an accurate estimate for what the value of that property will be after you make repairs and renovations. By comparing this number to the property’s current price, you can figure out if it’s a good buy with strong profit potential, or if you’ll end up with a money pit of a property.
To help you get accurate estimates, here are the factors that go into a property’s after repair value (ARV).
The Basic ARV Formula
There’s a very simple formula for a property’s ARV. All you need to do is add the value of any repairs and renovations you make to the purchase price of the property.
While that’s an easy formula to remember, the problem is that you still need to determine the value of those repairs and renovations. There are two ways you can do this.
Comparing the Property to Similar Sold Properties in the Area
The most effective way to determine your property’s ARV is to search for other properties that are similar to what your property will be after its repairs. When you look for these similar properties, make sure they fulfill the following requirements:
• They’re located in the same neighborhood – A property’s neighborhood has a huge impact on its value, making it useless to compare properties in different areas.
• They’re close to your property’s size – Not only do you need properties with similar square footage, but also an equal number of bedrooms and bathrooms.
• They’ve been sold within the previous year – The only way to know the true value of a property is to see what it sold for. Values for properties that sold more than a year ago are likely out of date, and you can’t learn anything from a property that hasn’t sold yet, because it will only have an asking price.
Try to find three at least three properties that fit these requirements, and then take the average of their values. Consider that the ARV for the property you may buy. This number should help you determine whether that property is a good deal.
The general rule is that the amount you pay to buy the property and to repair it shouldn’t exceed 70 percent of the ARV. Let’s say you calculate the property’s ARV is $500,000, and work on the property should cost $60,000. 70 percent of that $500,000 ARV is $350,000, and once you take off the $60,000 for repairs, you’re left with a maximum purchase price of $290,000.
Calculating the Return on Individual Repairs
If you can’t find properties that fit the bill as suitable comparisons, then your other, more complicated option is to determine the value each individual repair will add to the home. There are calculators available that provide the typical return on different types of home repairs and renovations.
You can use those calculators, along with the amount you plan to spend on each repair, to get a general idea of the value that repair will add. Note that any estimates should be taken with a grain of salt, and you must use your own judgement for more accurate results.
Repairs typically only provide a return up to a certain point, and after that, they become wastes of money. For example, fixing up a bathroom can add thousands of dollars in value, or more, to a house. But you likely won’t see a significant difference in value by choosing the most expensive tile and countertops versus good, but more affordable options. While homebuyers value tile and countertops, most won’t care enough to pay a premium for the most luxurious materials.
Even when you’re valuing repairs individually, you still must consider the other homes in the neighborhood. You’ll only make a solid return on repairs that make the property comparable to other properties in the area. People typically aren’t willing to spend significantly more than a neighborhood’s average home price, even if a home has all kinds of upgrades.
As you learn more about properties and flipping, it becomes easier to estimate ARV on the fly, which is why it’s so important to do plenty of research. Another option that often provides the most accurate results is hiring an appraiser to come up with an ARV for you, but this costs you money, and it’s better to learn how to do it yourself.
Your best bet is finding similar sold properties in the area and averaging out their values. Calculating the return on individual repairs can work, but it’s more difficult, more time-consuming and often less accurate.