When it comes to flipping houses, as well as wholesaling houses for that matter, being able to accurately calculate the After Repair Value (ARV) of a potential property is the most important skill that you need in your toolbox.
Ultimately, it’s your money on the line — and your decision to submit an offer on a property, or move on to the next without wasting time, will rely on being able to quickly and accurately determine this value.
This article was created with one goal in mind: Give you a clear overview of what ARV is, and the best way to calculate it: using standard appraisal techniques.
Since you can’t calculate the ARV without real estate comparables, I also introduce how to find comps and adjust them, for the most accurate After Repair Value.
What I’ll cover in this guide:
- What is ARV in real estate?
- Why do you need to know the ARV?
- What is the ARV formula in real estate?
- What is the BEST way to calculate ARV?
- How NOT to calculate ARV
- What are real estate comps?
- What is adjusting comps in a Sales Comparison Analysis?
- How to find comps?
- Steps to calculating ARV
What is ARV in real estate?
ARV, or After Repair Value, is an estimation of the future sales price of a property that is purchased for the purpose of fixing up and reselling for a profit. The ARV is the estimated market value of a property after repairs and upgrades have been performed.
The ARV is most often determined by using a Comparative Market Analysis (CMA for short.) to select appropriate comps, and then improved using a Sales Comparison Analysis, to get to the most accurate value.
Why do you need to know the ARV?
There are a number of reasons why you need to calculate the After Repair Value.
You are ultimately responsible for the success of your dealMost people involved in your real estate transaction have a direct conflict of interest with you when it comes to valuing the property. Click To Tweet
So while it may be tempting to rely on people who are “experts” be it your realtor or wholesaler, to tell you the After Repair Value of a potential property, when valuing real estate you must always ‘trust, but verify.’
I say this because it has been my experience that many realtors will not go above and beyond to provide you with a complete sales comparison analysis, and as a result their ARV is not as accurate as it could be.
I will show you how to perform this yourself by adjusting your comps later on in this post.
In addition, you might find that others will cherry-pick comps that are skewed towards the outcome that they are trying to achieve, which may not be in line with your goals.
It is better to learn how to calculate ARV on your own, so that you have confidence in your purchase decision.When it comes to valuing real estate for a fix and flip, never let anyone else tell you what a property is worth. Click To Tweet
To determine potential profit as part of the house flipping formula
Because the ARV will be the target sales price of your finished project, you will use it as one component of the formula to determine the potential profit of the deal, and whether to go through with it.
This is the house flipping profit formula:
Profit = ARV – Purchase Costs – Holding Costs – Sale costs – Rehab Costs
All of your project costs (Purchase, Sale, Holding, and Rehab costs) are subtracted from the After Repair Value to find the profit.
To quickly estimate the Maximum Allowable Offer (MAO) to purchase the property using the 70 percent rule
Another important use for the ARV is in calculating the most that a house flipper or wholesaler should offer for a fix and flip property to a seller.
Here’s the Max Allowable Offer formula for house flippers using the 70% rule:
MAO = (ARV * 70%) – Rehab Costs
For a wholesaler using this formula, they would add their fee to determine the Maximum Allowable Offer.
MAO = (ARV * 70%) – Rehab Costs – Wholesaler’s Fee
Read an in-depth analysis of the 70% rule for flipping houses, including whether you should ever break it, and how to determine the percentage for your market.
What is the ARV formula in real estate?
There are two ways to determine the after repair value in real estate:
- The “technically correct” way that nobody uses: by performing a sales comparison analysis of other properties in the current unrepaired state, and then adding the value of planned improvements.
- The way used by virtually 100% of investors: by means of a sales comparison analysis of properties comparable to your property in its potential rehabbed state.
The “technically correct” after repair value formula
The technically correct way to calculate the ARV formula relies on a determination of the current value of the property, as well as a detailed value for all of the planned renovation items:
ARV = Current Unrepaired Value of the Property + Value of Renovations
The first step is to come up with comparable properties in a similar state of disrepair, and perform a sales comparison analysis to adjust for any features that are different between the comparable properties, and the subject property.
The next step is to estimate the rehab costs for the property, and the value (not the cost) of each of those repairs.
As it is pretty difficult (if not impossible) and time consuming to determine the value of hundreds of repair and upgrade items for a potential property, investors rarely use this formula to determine after repair value.
So what is the best way to calculate after repair value? Use the sales comparison analysis of repaired or turnkey properties
The best way to find the ARV of a potential fix and flip uses the method that most closely follows one that appraisers use, which is the Sales Comparison Analysis of repaired properties.
A sales comparison analysis is a standard appraisal techniques revolve around finding comparables that are in a finished state, and adjusting them with the values of the features that are different between them.
I will provide an example of how to do this below, but first, let me briefly discuss why you should never use an Automated Valuation Method like Zestimate, Redfin estimate, Trulia estimate,… any automated value estimate.
How NOT to calculate ARV?
Appraisal is part science, part art. Part of that art is looking beyond bedrooms and bathrooms, and looking at the differences in features, and adjusting for quality of construction, finishings.
Although Machine Learning models are getting smarter each day, these are data points that are not yet available to automated valuation mechanisms, and require a certain level of human judgment.
This is why you should always walk your comps.Machine learning models that create automated property valuations can’t walk. Always walk your comps to ensure their suitability to your ARV analysis. Click To Tweet
Zillow’s data, for example, can be more than a year behind and is not useful in calculating current value.
So when you have incomplete data, and old data, there is no way that the machine will give you an accurate value.
Similarly Trulia is owned by Zillow, and they use the same data to come up with their valuation.
While Redfin’s data is more current and complete, they too suffer from not having the complete picture, and therefore cannot give you an accurate valuation.
So, if you now have excellent reasons why relying on automated valuation machines is not the way to find the value of a property, what IS the best way to find the most accurate ARV on your own?
Let’s start with basics – what are property comps?
What are real estate comparables?
In real estate terms, the principle of substitution states that a buyer will pay no more for a property than the cost of an equally desirable (and comparable) alternative property.
Comps, then, are those properties that have been recently sold, whose interior and exterior is similar to your potential property in a completed state, and that are within the boundaries of the neighborhood of your property.
Comparables for distressed properties would reflect the level of finishes and upgrades that will be performed, so only find comps that are rehabbed.
Once you have your comps, you will need to adjust them for the most accurate valuation, otherwise known as a sales comparison analysis.
What is adjusting comps in a sales comparison analysis?
Comps adjustment is the process of determining whether a particular feature (such as square footage, bedrooms, bathrooms, pools, fireplaces, views, garage spaces, and so on) makes a comp either superior, or inferior, to the subject property, and adjusting the sales price of the comp upwards or downwards by the amount of that feature’s value.
By doing this, you ensure that the comps reflect the subject property characteristics (or lack thereof) as closely as possible.
For example, when a subject property does not have a garage, but a comp does, the comp is superior to the subject regarding that feature. You would then adjust the sales price of the comp downward by the amount of a garage feature, to reflect the fact that the subject does not have a garage. One way to think of this is, “if the comp were being sold that same day, without the garage, how much would it have sold for?”
You never adjust the price of the subject property, only the sales price of the comparables.
What are feature values when adjusting comps?
Every feature of the subject property and comps must have a dollar amount assigned to it, known as the feature value. For example, a one-car garage in a particular city may be generally assigned a value of $10,000. You will use these feature values to adjust the comps.
Why should I adjust the comps?
This is the biggest question I get regarding using standard appraisal methods for calculating ARV: Why should I adjust the comps to calculate ARV? Why not just average the sales prices of the comps together and be done with it?
Bottom line, averaging the sales prices of the comps together without adjusting for features will result in a valuation that is not accurate.
Here’s a simplified example:
Subject: 1000 square feet, no pool, as-is listed price $50,000
Comp 1: 900 square feet, sold for $100,000, has pool
Comp 2: 1100 square feet, sold for $100,000, no pool
Comp 3: 950 square feet, sold for $100,000, has pool
Pool in this neighborhood has a feature value of $20,000.
Comp 1: $100,000
Comp 2: $100,000
Comp 3: $100,000
Unadjusted ARV = $100,000+$100,000+$100,000/3=$100,000
Comp 1: $100,000, adjusted downward by $20,000 due to having pool: $80,000
Comp 2: $100,000, adjustment is $0 due to both subject and comp having no pool
Comp 3: $100,000, adjusted downward by $20,000 due to having pool: $80,000
Adjusted price per square feet: $80,000+100,000
Adjusted ARV = $80,000+$100,000+$80,000/3 = $86,667
If you had proceeded with your as-is 50k investment, you’d be losing money before you even got started because when it came time to sell, your subject property without a pool would sell for $13,000 less than what you had estimated with your unadjusted ARV.
When you think about how many features there actually are in any given set of comps, you can see why adjustments are vitally important.
Now that you have a better understanding of the ‘why’ of adjusting comps, next I talk about how to find comps.
What are the best ways to find comps?
The Multiple Listing Service, or MLS, is the best and most up-to-date source of sold listings. Access to the MLS is restricted to licensed professionals, so you will most likely need to request comps from the MLS through a real estate agent. That’s not always convenient, or possible, as you don’t want to bother your realtor for the hundreds of deals you might want to look at to see if they’re even deals.
Outside of the MLS, Zillow.com and Redfin.com are two of the largest property data aggregators available that can be searched and filtered for sold listings.
Redfin is an actual broker, and as a result, their data includes MLS data that is only slightly delayed. Unfortunately, Redfin is not available everywhere, and may not be available in your market.
The Public Record
The public record, depending on your location may be a perfectly fine source of comps. You can find public record data on assessor websites, and of course Zillow, and other sites such as ours.
What we use
Free ARV Calculator
The free public version of the ARV calculator provides suggestions using the Zillow API. Although it is good enough for a quick valuation, this is not ideal if you need to perform a professional grade analysis, as the Zillow API doesn’t provide a complete set of comps.
This is a problem that all low cost software that uses the Zillow API will have, and why the paid version of our software uses a high quality premium source for comps.
Unlike most other software out there, the free tool does however allow you to add other comps to improve your analysis. I recommend that if you are using the free tool, that you supplement the suggested free comps by adding your own in the additional comp search box.
Premium version of the ARV Calculator
The premium version of the REI/kit ARV calculator uses a high quality premium source of public record comps that has great nationwide coverage, frequently updated for the best accuracy of your after repair value analysis.
Additionally, you can very easily import additional comps into the premium REI/kit ARV estimate tool, using a spreadsheet from other sources such as the MLS.
You can read more about why we pay to provide you premium comps data here: Comps & ARV Tool Updates
What are the steps to calculate after repair value?
There are three steps to follow in order to calculate ARV using a comparable sales analysis.
- Select the most appropriate comps using appraisal criteria
2. Adjust the comps to make them look like your property
3. Calculate ARV
Select the most appropriate comps using appraisal criteria
When finding appropriate comps, try to find properties that fit these criteria:
- have sold within the previous 3-6 months;
- are within the neighborhood geographic boundaries (*);
- have similar features;
- are approximately the same square footage;
- and are of similar construction and finishings
(*) Neighborhood boundaries are things such as waterways, large arterial roads, parks, and railroad crossings. It’s not good enough just to run comps that are in a 1 mile radius. Often the next street over is a completely different neighborhood with completely different home values.
Other considerations when finding comps:
Generally, only compare above-ground square footage. If the property is two-story with 2,000 square feet, with a basement of 1,000 square feet, you would only compare it to other 2,000 square foot houses, not 3,000 square foot houses.
Similar Type: condo to condo, Colonial to Colonial, duplex to duplex, and so forth.
Age: Comps should be within 10 years of subject property age (if under 50 years old).
School Ratings: Check school zones and ratings; comps should be within the same zone, or have similar ratings if in different zones.
Type of sale: You want your comp to be a conventional sale between two buyers that are not related, and where both parties were under no duress to sell or purchase. This is considered an “arms-length” transaction. If the comp’s transaction is actually a short sale, ‘as-is’ sale, foreclosure, and so on, then the comp should be removed from your list. If using the MLS to locate comps, it is easy to find out what type of sale it is; however, if using Redfin.com, Zillow.com, or Realtor.com you will need to determine the sale type from the property’s listing description.
Size: Avoid using comps that are much smaller than the subject, as adjusting for a much larger square footage will skew your values considerably.
Narrow down to comps that are rehabbed
Once you have a list of comps similar to the property, select only those three to five comps in the same condition that you think your property is going to end up in, which is newly rehabbed and updated.
Since it’s not likely you found comps that matched your property in every single way, you will need to adjust the comps.
The Sales Comparison Analysis: Adjust comps to make them look like your property
Adjusting comps is a three part process:
1: Assign dollar values to features
2: Adjust the feature values of a comp
3: Adjust the sales price of that comp up or down
As mentioned earlier, you will need to assign a dollar value to the different features of the subject property and also of the comps.
How to find dollar values for features
Values vary widely between markets, even between neighborhoods, and there isn’t a good data source for this so you will need to come up with your own data for the neighborhood that the subject property is located in. Fortunately, it’s not too hard to do this.
There are three main ways to find a value for features and amenities:
You can get local knowledge from a realtor as to those values. You should already have a realtor on your team and should be able to speak freely with them about it. If you don’t have one on your team, you can look at who is known for selling the most properties in a particular neighborhood and call them up about one of their listings.
If you can’t get the values using the local knowledge route, one trick is to perform a sales comparison analysis with 3 comps that are exactly the same, and a comp that is missing that feature, and then you would be able to check for the difference in value between those.
Finally, you can use the costs method, which is basically what would it cost to build out a bedroom with new construction, and you can use the rehab estimate tool to itemize the costs to do this. This is the least accurate way, as it doesn’t account for market value, only for cost — which aren’t always correlated.
Considerations for Adjustments:
Make sure you are valuing the land as well, if it is a lot of land, or if land tends to be exorbitantly expensive.
Compare similar lot sizes, or adjust for land value.
Every feature that your property has, or does not have, must be adjusted for in each comp. Multiply the value of a comp’s feature by the number of units of a feature it has. Conversely, apply a negative value if the comp has less than the number of units of a feature that your property has. So for example if your subject has 2 bedrooms and your comp has 4 bedrooms, then your feature value adjustment for bedrooms would be -(2beds X $10,000) = -$20,000
Increase or decrease the sold price of a comp upward or downward after adjusting for individual features.
- If your property and the comp have the same number of a feature, the adjusted value is 0.
- If your property has two units of a feature and the comp has one unit of that feature, the comp’s sold price is increased by that feature unit’s value.
- If your property has one unit of a feature and the comp has two units of that feature, the comp’s sold price is decreased by that feature unit’s value.
So for example if your subject had 2 beds and 2 baths, but your comp had 4 beds and 1 bath, then and a bedroom was worth $10,000 and a bathroom was worth $5,000, then your net adjustment to the comp would be:
-(2beds X $10,000) + (1bath X $5,000) = -$20,000+$5,000 = -$15,000
Having adjusted your comps, it’s time to calculate the ARV.
After you have adjusted the value of all three to five comps, calculate the ARV. To do this:
- Take the value of each comp and divide it by its corresponding square footage. This will give you the adjusted price per square foot of each comp.
3. Add the final square footage values of all comps together.
4. Divide by the number of comps to get an averaged price per square foot. (*)
5. Multiply your property square footage by the averaged price per square foot.
(*) Averaging $/sqft is good enough for most scenarios, though technically an Appraiser will do a weighted average based on how much he or she feels the comp contributed to the $/sqft.
So that’s it. The trick in getting an accurate ARV is in selecting the right comps in the first place, and knowing and adjusting for the values of your most important comparable features.
You can do this in a spreadsheet, or you can use tools like our free ARV Calculator adjustment tab to help you perform these adjustments.