I get a lot of questions from students about the After Repair Value Formula.
After Repair Value (ARV) represents the value of the house or property after it has been fixed up and prepared for sale. In other words if your goal was to fix and flip a property, then your assumption about what you could sell the house for (after it has been remodeled) would be the After Repair Value.
The ARV is what a property would “theoretically” appraise for. I say theoretically because it may appraise for more or less than what you estimate for ARV. However if you are a rehabber who fixes and flips houses for a living, then you would want to do very solid research on comparable sales in order to have a good idea of what you could sell the house for after you have fixed it up.
A good rule of thumb is the ARV Formula which states that you should not pay more than 65% of the After Repair Value, Less the Repairs in order to have a good deal for a fix and flip. The ARV Formula is also important since if you are paying cash for a house and requesting a hard money loan then your hard money lender will typically lend based on this formula.
After Repair Value (ARV) Formula
ARV = After Repair Value (what the house would be able to sell for after repairs)
RE = Repair Estimate (what it will cost you to fix up the property)
MOP = Maximum Purchase Price (the most you should pay to acquire the property)
Here is the formula:
(ARV) Multiplied By 65% Minus the (RE) = the MOP
or mathematically (ARV x 0.65) – RE = MOP
You can also express this formula in other ways (remember Algebra?)
ARV = (MOP + RE)/0.65
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