Estimating the After-Repair Value of a House When Choosing to Flip
Looking to start flipping houses but not sure what to look for in a property? This is not an uncommon problem for first time real estate investors because there are several different factors that need to be considered before purchasing a flip. How much rehab will the home need? Is it in a nice neighborhood located near great schools? What will the home be worth once the rehab is finished? These are all questions that you’ll have to consider and answer when looking at different properties to flip.
One of the key metrics to help determine the value of a fix-and-flip property is the ARV, or After Repair Value. This metric is used by investors and lenders to help determine the strength of an investment property. In this post we’ll help you understand what ARV is and how you can calculate it to help your fix-and-flip project be successful.
1) What is ARV?
The first step in using ARV to your advantage is understanding exactly what it is and how it is useful for a fix-and-flip project. ARV is the estimate of what a property will be worth once all of the rehab has been completed. ARV is determined by estimating the amount of rehab that will be put into the property, the comparing sales for other similar properties in the same neighborhood once the appraisal of your potential property has been completed. After you have found the ARV, you’ll have a good understanding of what you’ll be able to sell the property for once it is ready to hit market.
2) Calculating ARV
Now that you have a solid understanding of what ARV is, how do you calculate it? When a real estate investor applies for a loan with a lender they will lend up to a certain percentage of the ARV. The standard maximum percentage is 70%, with anything above that amount considered to be too risky for the lender. To calculate what percentage the loan to ARV will fall under simply divide the loan amount by the ARV. For example, if you have a loan amount of $175,000 and an estimated ARV of $250,000 your loan to ARV will be exactly 70%.
Flipping houses is a very exciting and rewarding way to grow your personal income. Understanding how the numbers such as the ARV work will go a long way in helping to find properties that will give you a better chance at earning higher profits and a better return on investment.
Lima One Capital is the premier lender for real estate investors. We make it easy it finance all of your fix-and-flip, rental property, and multifamily investments. We are a national hard money lender lending in 41 states as well as Washington, D.C. We have a passion for real estate and helping real estate investors become successful in their pursuit of their entrepreneurial goals. If you would like to learn more about our FixNFlip program, click here.