What is ARV and how is it calculated?
The ARV (or After Repaired Value) definition states the following: the value of a property after it has been rehabbed, not in its current condition.
Determining ARV in Real Estate
To calculate the ARV of real estate, an appraiser will go and look at the property to determine its current value, and then the value after it is repaired, based on a repair list submitted by Rehab Financial.
The appraiser will look at the repairs on the list, like adding square footage, adding a bathroom, or if walls will be moved to significantly to change or improve the layout of the house. He or she will then find properties in the neighborhood that are comparable to the property after the planned repairs and improvements are completed. Based on those comparable properties and the differences or similarities to the property in question, he or she will then determine the property’s after repaired value.
Simple After Repair Value Formula
The ARV formula that the appraiser will use is quite simple. They use the purchase price and then they add the added value as previously described.
(Purchase Price) + (Value From Renovations) = After Repair Value
The 70% Rule
The 70% rule is a guideline in the real estate investing business that states no bid price at the beginning of a project should exceed 70% of the ARV minus estimated repair costs.
(ARV x 70%) - Estimated Repairs = Maximum Purchase Target
This is a rule of thumb that real estate investors should follow which will allow them to make a 30% return on their investment (ROI).
Rehab Financial uses a rule of 65% when it comes to lending on a project. Once RFG receives the ARV from the appraiser, we calculate 65% to determine the maximum that we are willing to lend.
After Repair Value x 65% = Maximum Loan Amount
That is the amount we will lend you towards your purchase and rehab costs. In many cases, this is enough financing to allow our borrowers to arrive at the closing table with zero cash down.
Here’s a basic example of calculating a maximum loan amount from ARV: If the ARV determine by the appraiser is $250,000, Rehab Financial will lend you 65% of that, or $162,500.