How to Calculate ARV for Wholesaling

After Repair Value (ARV) is a financial metric used in real estate to estimate a property’s potential market value once all necessary repairs and renovations are completed. This projection is particularly important for real estate wholesaling, as it helps determine the property’s potential after it has been brought to an updated condition. For wholesalers, understanding ARV is fundamental because it directly influences the maximum price they can offer for a distressed property. Accurately calculating ARV allows wholesalers to identify profitable opportunities and structure deals that appeal to their cash buyers, typically real estate investors who intend to rehabilitate and resell the property.

Researching Comparable Properties

Determining a property’s After Repair Value begins with a thorough analysis of comparable properties, often called “comps.” These are recently sold homes that share similar characteristics with the subject property, providing a benchmark for its potential renovated value. Ideal comparables are located in close proximity, generally within a quarter to half-mile, and have sold within the last three to six months.

Key features to consider when selecting comps include the number of bedrooms and bathrooms, total square footage, lot size, construction style, and the overall age and condition of the property. For instance, comparing a two-bedroom, one-bathroom home to a four-bedroom, three-bathroom home would not yield an accurate assessment. Real estate agents often provide access to the Multiple Listing Service (MLS), a reliable source for sales data, while public records and online platforms like Zillow and Realtor.com can also provide valuable information.

Once suitable comparables are identified, their sales prices must be adjusted to account for any differences from the subject property. If a comparable has superior features, such as an extra bathroom or a larger lot, a negative adjustment is made to its sale price. Conversely, if the comparable is inferior in certain aspects, a positive adjustment is applied to its price. For example, if a comparable property has 250 more square feet than the subject property and the estimated value is $125 per square foot, you would subtract $31,250 from the comparable’s sale price to make it more equivalent.

Assessing Repair Expenses

Accurately estimating repair expenses is an important step in determining the After Repair Value, as these costs directly impact a property’s profitability. This process begins with a comprehensive inspection of the distressed property to identify all necessary renovations required to bring it to market-ready condition. Repair categories typically range from cosmetic updates, such as fresh paint and new flooring, to minor structural or mechanical issues like roof repairs or HVAC system replacements.

More extensive renovations might involve major structural problems, such as foundation repair, or significant overhauls of plumbing and electrical systems. Estimating these costs can be done through various methods, including obtaining detailed bids from multiple licensed contractors for specific jobs. For a quick initial assessment, some investors use per-square-foot averages, which can range from approximately $10-$25 per square foot for light cosmetic work to $60 or more per square foot for properties requiring extensive gut renovations.

While per-square-foot estimates offer a rapid overview, creating a detailed line-item budget provides a more precise cost breakdown for each repair task. This meticulous approach helps account for variations in material costs and local labor rates, which can significantly influence the overall expense.

Calculating the After Repair Value

With the comparable property data thoroughly analyzed and adjusted, the next step involves synthesizing this information to calculate the After Repair Value (ARV). The most common method involves selecting the most relevant adjusted comparable sales and averaging their values.

For instance, if three adjusted comparable properties sold for $250,000, $260,000, and $245,000 respectively, the ARV would be the sum of these values divided by three, resulting in an average of $251,667. Alternatively, some investors calculate an average price per square foot from the adjusted comparables and multiply that by the subject property’s square footage to arrive at the ARV.

The calculated ARV is a forward-looking estimate, projecting the property’s worth in a future, improved state. It does not reflect the property’s current, distressed value but rather its potential in a competitive market.

Setting the Maximum Offer Price

The calculated After Repair Value (ARV) and the estimated repair expenses are important in determining the maximum price a real estate wholesaler can offer for a property. A widely used guideline among investors for this purpose is the “70% Rule”. This rule suggests that an investor should pay no more than 70% of the ARV, minus the estimated repair costs and any associated fees.

The formula for the Maximum Allowable Offer (MAO) is: MAO = (ARV \ Investor’s Target Percentage) – Estimated Repair Costs – Wholesaler’s Fee. The investor’s target percentage is often 70%, though it can vary based on market conditions or individual preferences. The “wholesaler’s fee” is the compensation the wholesaler earns for finding the deal and facilitating the transaction, typically ranging from $5,000 to $15,000, though it can be higher depending on the deal’s profitability.

For example, if a property has an ARV of $250,000, estimated repair costs of $50,000, and the wholesaler aims for a $10,000 fee, the calculation would be: MAO = ($250,000 \ 0.70) – $50,000 – $10,000. This results in an MAO of $175,000 – $50,000 – $10,000, equaling $115,000.