How To Calculate ARV
The basic ARV formula is fairly simple:
The Property’s Current Value + The Value of Renovations = ARV
With this formula, you should get an idea of how much a home could be worth after renovations, assuming everything goes according to plan and additional issues don’t come up during the renovation process. If your home is worth $150,000 and the estimated value of renovations is $30,000, for example, you would come up with an ARV of $180,000.
However, the basic formula doesn’t consider a few things that are needed to make a fully informed ARV estimate. If you intend to use ARV to come up with an offer for a property or to secure financing for repairs, you’ll want to also do the following:
1. Evaluate The Comparables
Comparables, or “comps,” are properties similar to the one you are renovating or flipping that have recently sold nearby. Real estate comps can be most easily found on a multiple listing service (MLS). If you’re not highly experienced with calculating ARV, you may want to contact a real estate agent for help since they have access to an MLS and knowledge of comps in your area.
Comps should be:
- In the same neighborhood as the house you’re renovating
- A similar square footage and style of the property
- A similar age to the property
- In similar condition to the property (in terms of upgrades)
By looking at the sale prices of a few comparable properties, you can calculate ARV a little more accurately by considering what is typically paid for the renovations you plan to do on the property.
Most real estate professionals use around 3 – 5 comparable properties for an efficient market analysis and average their selling prices to get an idea of what their own ARV should look like. If you find four similar properties and their sale prices average around $170,000, that would be a good estimate for the future value of the property you’re renovating, once it has the same upgrades.
2. Appraise The Property
One of the most important things you can do to calculate ARV more accurately is to have your home appraised. Knowing the current value of your home helps give a better idea of what your property is worth before the value of renovations is added.
Once you hire an appraiser to look at your property, they will evaluate every part of the home, including but not limited to:
- Overall condition
- Property size in square feet
- Number of amenities, including the number of bedrooms and bathrooms
- Curb appeal
- Location
Once the appraiser has checked out every aspect of the home, they can give you an estimate of the current value. Knowing the current value of your home can give you a more concrete starting point when calculating your ARV, which will make the value you come up with more accurate.
You will want to have the property appraised after completing renovations as well. Your home may be appraised at a higher or lower value than what the ARV was estimated to be. Since the housing market fluctuates and things can come up during renovations, it’s important to do an appraisal post-renovation to come up with an accurate listing price for the property.
3. Assess The Value Of Repairs
Though an appraiser mainly looks at your home to determine the market value, they can also point out repairs that need to be made and potentially even what those repairs will cost. Finding anything that might need fixing in addition to your planned repairs will prevent you from encountering unexpected costs after already calculating and using the ARV.
It’s important to stay realistic when estimating the cost and value of repairs. ARV can be tricky to calculate since so many factors play into it. Still, if you work with the appraised value of your home and account for all repairs as well as comparable properties, you should be able to settle on an ARV estimate.
