Determine your After Repair Value
So you have done all your research, and have a property in a great neighborhood and market that you want funding for now! Before you get in over your head, there is some additional research you need to do. You need to understand the importance of your After Repair Value, or AFV. AFV is important because it is used to determine a project sale, renovation budget and profit! ARV is the most important calculation for fix-and-flip investors, because when working with lenders, and it’s common to calculate profit and future value for the long-term properties.
The following information is important when determining a property’s current value:
- Location (neighborhood, accessibility, proximity to amenities, etc)
- Lot (size, corner or interior, shape, slope, terrain, roads available, etc)
- Structure (size, number of stories, type, style, etc)
How it works:
After figuring out the property’s current value, the next step is to estimate the repairs needed and the value of those repairs. ARV is the sum of the purchase price and the value of repairs. You will need to estimate the cost of these repairs to determine your project’s profitability.
How to calculate:
Let’s say the property’s purchase price is $100k, the repair cost is $25k, and you expect to sell it for $150,000, the value of repairs is $50k but the cost of repairs is only $25k. This results in an ARV of $150k and a potential profit of $25k.
ARV is important because it determines a projects sale price, renovation budget, and overall profits for the flippers. It is also used investors looking to determine the value of a rental property after renovations to estimate rent and/or the future value of the long-term property.
Knowing your flips potential ARV helps find investors, lenders and find a variety of loan options. It also help set your budget and understanding for your max profit for the repairs you will make, and how much to list it for in the future.