In house flipping, ARV or After Repair Value is the most important number. You base all your decisions on after repair value, including purchase costs, repair costs, closing costs, and potential profit.
Your ARV is essentially an appraisal value of what the property will realistically sell for quickly after it is renovated and beautified. Just like a real estate appraisal that a bank requires before they lend money on a property.
Only in the fix & flip house world, you need a firm after repair valuation number before you buy the property. It’s very similar to a CMA, or Comparative Market Analysis.
After Repair Value Factors
- Neighborhood – How nice are the other homes nearby. Schools, shopping, etc.
- Location – How attractive and convenient is the location. Roads, power lines, trees, etc.
- Square footage – How much heated square footage will be in your renovated home.
- Curb appeal – How much wow factor is visible from the street.
- Size, layout, and type of house – Certain home styles and layouts are more appealing than others.
- Interior quality – Flooring, paint, lighting, carpeting, walls, doors, windows, etc.
- Kitchen upgrade – Cabinets, counter tops, layout, breakfast bar, quality of materials.
- Master suite – Size, layout, master bath enhancements
- Number of bedrooms – More bedrooms means more value per square foot.
- Number of baths – More bathrooms (updated ones) means higher prices.
- Get 3 comps of sold properties in this neighborhood (not one a mile away)
- Get 3 comps of nearby listings for similar upgraded properties
In a house flip, you never want to exceed 70% of ARV for all your costs – purchase, repair, carrying costs, and sales.
In fact, most lenders will only loan you 80% of the 70% of the ARV number. Many will also require a Comparative Market Analysis to compare with the after repair value number.
Why? Because they know that operating on skinny margins is bad business and if something goes wrong – and something ALWAYS goes wrong – then you will quickly be faced with losing money on the deal.
Tried & True After Repair Values
- Purchase Costs – Your fixer upper should cost 40% to 60% of potential ARV.
- Renovation Costs – Your repairs and upgrades should be 20% to 30% of ARV.
- Carrying Costs – Your loan costs should be no more than 8% of ARV.
- Selling & Closing Costs – Your real estate fees and closing costs are roughly 7% of ARV.
- Total Costs – Your total expenditures should not exceed 70% of ARV.
The lower the house cost as a percentage of ARV, the higher the repair costs will be. If you are buying a house to flip at 60% of ARV, then it should be mostly cosmetic repairs and upgrades, not a full kitchen & bath gut job.
So, pay close attention to your ARV numbers going in on the purchase and during the renovation phase. Don’t think that you can make it up elsewhere because you may end up overpricing your house flip and end up incurring substantial carrying costs instead.