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GlossaryInvestingValuation

After repair value

2 min read
Short answer
After repair value is what a property will be worth once the planned work is finished. It is estimated from comparable sales of already-renovated properties, and it is the figure that hard money loans, 203(k) loans and the 70 percent rule are all built on. Overestimating it is the single most common way a flip loses money.

After repair value is what a property will be worth once the planned renovation is complete.

Every flip, every rehab loan and every BRRRR refinance is underwritten against it, which makes it the most consequential estimate in distressed property investing — and it is an estimate about a house that does not exist yet.

How to estimate it properly#

From comparable sales of already-renovated properties.

Same neighbourhood, similar size and configuration, sold recently, and finished to a standard comparable to what you intend.

The discipline is in that last condition. Comparing your planned mid-range renovation to sales of high-end finishes produces an ARV you will not reach.

How not to estimate it#

Purchase price plus renovation budget. Money spent is not value added, and past a certain point in any given market it demonstrably is not.

Active listings. Asking prices are aspirations. Only closed sales are evidence.

An automated valuation. Models cannot see condition, which is the entire variable in a renovation.

The best sale in the neighbourhood. One outlier is not the market.

The 70 percent rule#

The standard screening heuristic:

Maximum offer = (ARV × 0.70) − repair costs.

On a $250,000 ARV with $40,000 of repairs: $175,000 minus $40,000 gives a maximum offer of $135,000.

The 30 percent is not profit. It covers holding costs, financing, selling costs, and profit, and on a thin project it covers less of each than people expect.

It is a filter rather than an analysis. Its value is in quickly rejecting deals that cannot work, not in confirming that ones passing it will.

The ceiling problem#

Every neighbourhood has one.

Beyond a certain finish level, additional spend stops producing additional value, because buyers in that area will not pay more regardless of what was installed.

A renovation that would be appropriate three miles away can be over-improvement here, and the over-improvement is unrecoverable.

Reading the comparables tells you where the ceiling is. Ignoring it is how a well-executed renovation loses money.

Functional obsolescence does not repair#

The distinction that separates recoverable discounts from permanent ones.

A property discounted for condition can be brought back with money.

A property discounted for layout — the four-bedroom house with one bathroom in a footprint that cannot take a second — may not be, and that discount survives the renovation.

Modelling a purchase as condition-only when part of the discount is design produces an ARV the property will never reach.

Our ARV calculator runs the 70 percent rule and the maximum-offer arithmetic, but the comparables are the work and no calculator can do them for you.

Common questions

How do you estimate ARV?
From comparable sales of properties already in the condition yours will be in — same area, similar size, recently sold, and genuinely renovated to a similar standard. Not from listings, and not from adding your renovation budget to the purchase price.
What is the 70 percent rule?
A screening heuristic: maximum offer equals ARV times 0.70, minus repair costs. On a $250,000 ARV with $40,000 of repairs, that is $175,000 less $40,000, so $135,000. The 30 percent covers holding costs, selling costs, financing and profit.
Why do ARV estimates go wrong?
Comparables that are not genuinely comparable, a renovation standard below what the comps achieved, a market that moved during the project, and the assumption that money spent equals value added — which is false past a certain point in any given neighbourhood.
Keep reading
Comparable sales
Recent sales of similar nearby properties, adjusted for differences, used to estimate what a subject property is worth.
Hard money loan
Short-term asset-based financing secured by property, priced on the deal rather than the borrower and used where speed matters more than cost.
Deferred maintenance
Repairs and upkeep postponed rather than performed, accumulating as a hidden liability that reduces a property's value and eventually its habitability.