How to Calculate ARV Wholesaling?

Calculating the after repair value (ARV) is a crucial step in wholesaling real estate that helps investors determine the maximum offer price for a property. To calculate the ARV, you need to find comparable properties (comps) in the multiple listing service (MLS) that have recently sold and are similar to the subject property. These comps should match in terms of condition, age, size, construction, style, and location.

You typically need three to six comps, preferably sold within the past 90 days. There are two common methods for determining the ARV. One method involves averaging the sales price of the comps, while the other method determines the average price per square foot of the comps and multiplies it by the square footage of the subject property.

The ARV is an important factor in determining the maximum offer price. Wholesalers and rehabbers often use the 70% rule, which states that the maximum offer price should be 70% of the ARV minus the estimated repair costs. However, some investors may deviate from this rule, going as high as 75%–80% of the ARV depending on the market conditions.

Accurately estimating repair costs and using reliable comps are essential for an accurate ARV calculation. Private and hard money lenders also consider the ARV when providing financing for fix-and-flip projects. They often lend up to 65% of the ARV, making the accurate determination of the ARV crucial for securing funding.

Overall, calculating the ARV is a critical step in wholesaling real estate. It enables investors to determine the maximum offer price and secure financing for their projects. By accurately estimating repair costs and using reliable comps, investors can make informed decisions and maximize their profitability in the wholesaling industry.

Finding Comparable Properties

To calculate the after repair value (ARV), you need to find comparable properties (comps) in the multiple listing service (MLS) that closely resemble the subject property. These comps should be similar in terms of condition, age, size, construction, style, and location. By analyzing recent sales of similar properties, you can estimate the potential value of your subject property after repairs.

Typically, you should aim to find three to six comps that have sold within the past 90 days. These recent sales are important because they reflect current market conditions. The MLS is a valuable resource for locating comps, as it provides a comprehensive database of properties listed for sale or sold in your area.

When selecting comps, consider properties that are similar to the subject property in terms of size, layout, and features. Look for properties that have undergone similar repairs or renovations if possible. It’s also essential to choose comps that are in the same neighborhood or area, as location can significantly impact property value.

Criteria for Selecting Comps
Similar condition
Similar age
Similar size
Similar construction
Similar style
Similar location
Recent sales (within 90 days)

Once you have identified suitable comps, you can use their sales prices to determine the ARV. This will provide a starting point for calculating the maximum offer price in your wholesaling real estate venture.

Determining the ARV

There are two main methods for determining the after repair value (ARV) in wholesaling real estate: averaging the sales price of the comparable properties (comps) or calculating the average price per square foot and multiplying it by the square footage of the subject property.

To use the first method, you need to find comps in the multiple listing service (MLS) that have recently sold and are similar to the subject property in terms of condition, age, size, construction, style, and location. Typically, three to six comps are recommended, preferably sold within the past 90 days. Once you have identified the comps, you can calculate the ARV by averaging their sales prices.

The second method involves determining the average price per square foot of the comps and multiplying it by the square footage of the subject property. This approach provides an estimate of the ARV based on the size of the property. It is important to note that both methods rely on accurate and reliable comps to ensure an accurate ARV calculation.

Method	Steps
Averaging Sales Price	1. Find comparable properties (comps) in the MLS that have recently sold and are similar to the subject property. 2. Determine the sales price of each comp. 3. Calculate the average of the sales prices to determine the ARV.
Price Per Square Foot	1. Find comps in the MLS that have recently sold and are similar to the subject property. 2. Determine the price per square foot of each comp. 3. Calculate the average price per square foot. 4. Multiply the average price per square foot by the square footage of the subject property to determine the ARV.

Regardless of the method used, the ARV is a crucial factor in determining the maximum offer price. Wholesalers and rehabbers often follow the 70% rule, which suggests that the maximum offer price should be 70% of the ARV minus the estimated repair costs. However, some investors may deviate from this rule and offer as high as 75% to 80% of the ARV depending on the market conditions.

Accurately estimating repair costs and using reliable comps are essential for a precise ARV calculation. Private and hard money lenders also consider the ARV when providing financing for fix-and-flip projects. They typically lend up to 65% of the ARV, making it crucial to calculate the ARV accurately to secure the necessary financing.

The 70% Rule

Wholesalers and rehabbers often use the 70% rule to calculate the maximum offer price, which states that it should be 70% of the after repair value (ARV) minus the estimated repair costs. This rule serves as a guideline to ensure a profitable wholesale deal or fix-and-flip project. By adhering to the 70% rule, investors aim to account for their expenses and achieve a desirable return on investment.

Calculating the maximum offer price correctly is essential in wholesaling real estate. As mentioned earlier, the ARV determines the market value of the property after necessary repairs and renovations. Knowing the ARV accurately allows investors to determine the highest price they can offer for the property while still ensuring a profitable deal.

It’s important to note that the 70% rule is not a hard and fast rule but rather a starting point. Depending on the condition of the property and the local market conditions, some investors may deviate from the rule and offer up to 75%–80% of the ARV. However, it’s crucial to have a clear understanding of the market and accurately estimate repair costs to avoid overpaying for a property.

The 70% Rule in Action

Let’s illustrate the 70% rule with an example: Suppose the ARV of a property is estimated at $200,000, and the estimated repair costs are $30,000. To calculate the maximum offer price, we subtract the repair costs from 70% of the ARV:

ARV	Estimated Repair Costs	Maximum Offer Price (70% rule)
$200,000	$30,000	$140,000

In this example, the maximum offer price would be $140,000. This calculation ensures that the investor has enough margin to cover repair costs, closing costs, holding costs, and still make a profit upon selling the property.

Overall, understanding and applying the 70% rule when determining the maximum offer price in wholesaling real estate can help investors make informed decisions and achieve profitable outcomes. However, it’s crucial to consider the specific market conditions, accurately estimate repair costs, and use reliable comps to ensure an accurate calculation.

Alternative Approaches to ARV Calculation

While the 70% rule is commonly used, some investors may choose to deviate from it and offer between 75%–80% of the ARV based on the market conditions. This alternative approach takes into account factors such as the demand for properties in the area, the level of competition, and the projected appreciation in value. By offering a higher percentage of the ARV, investors aim to secure a deal in a competitive market or capitalize on a rapidly appreciating neighborhood.

Another method that some investors employ is the “as-is” ARV calculation. Instead of calculating the ARV based on the projected value after repairs, this approach considers the current market value of the property in its current condition. This can be useful when dealing with distressed properties that require extensive repairs.

Market-Dependent Offer Price

It’s important to note that these alternative approaches are market-dependent, meaning their applicability varies depending on the local real estate market. In a highly competitive market with rising prices, offering closer to 80% of the ARV may be necessary to secure a deal. On the other hand, in a buyer’s market with ample inventory, sticking to the 70% rule or below might be more prudent.

To determine which approach is most suitable, investors should analyze the current market conditions, consult with local real estate professionals, and consider their risk tolerance. It’s also crucial to accurately estimate repair costs and use reliable comps when calculating the ARV, regardless of the chosen approach. This ensures a realistic understanding of the property’s value and helps investors make informed decisions.

Approach	Advantages	Considerations
The 70% Rule	Conservative approach	May lose competitive edge in hot markets
75%–80% of ARV	Allows for higher offer prices in competitive markets	Higher risk if market conditions change
“As-Is” ARV Calculation	Accounts for current property conditions	Requires accurate assessment of repair costs

In summary, while the 70% rule is a commonly used guideline for determining the maximum offer price in wholesaling real estate, alternative approaches can be considered based on the market conditions and individual risk appetite. By analyzing the market, accurately estimating repair costs, and using reliable comps, investors can calculate the ARV effectively and make informed decisions to achieve success in their real estate ventures.

Importance of Accurate ARV Calculation

Accurate ARV calculation is crucial for determining the maximum offer price and securing financing for fix-and-flip projects. Private and hard money lenders often lend up to 65% of the ARV, making it essential to calculate this value accurately to maximize funding opportunities.

When calculating the ARV, it is important to find comparable properties (comps) in the multiple listing service (MLS) that have recently sold and closely resemble the subject property in terms of condition, age, size, construction, style, and location. These comps provide a benchmark for estimating the value of the subject property after repairs.

Wholesalers and rehabbers often rely on the 70% rule for determining the maximum offer price. According to this rule, the offer price should be 70% of the ARV minus the estimated repair costs. However, depending on the market conditions, some investors may deviate from this rule and offer up to 75%–80% of the ARV. Accurately calculating the ARV helps determine the appropriate offer price, ensuring a profitable deal.

Benefits of Accurate ARV Calculation:

• Maximizes funding opportunities: Private and hard money lenders often lend up to 65% of the ARV, so an accurate calculation helps secure adequate financing for fix-and-flip projects.
• Ensures profitability: Accurate ARV calculation identifies the maximum offer price, allowing wholesalers and rehabbers to negotiate profitable deals.
• Reduces risks: By using reliable comps and accurate repair cost estimates, investors minimize the risk of overpaying for a property.

Example Scenario:

Suppose an investor determines the ARV of a property to be $200,000. Following the 70% rule, they would offer $140,000 ($200,000 x 0.70) minus the estimated repair costs. If the estimated repair costs are $30,000, their maximum offer price would be $110,000 ($140,000 – $30,000). This calculation allows the investor to negotiate a profitable deal within the market’s parameters and secure financing accordingly.

ARV Calculation Method	Maximum Offer Price
70% Rule	$110,000
75% of ARV	$150,000
80% of ARV	$160,000

Estimating Repair Costs

Accurately estimating repair costs is essential for calculating the after repair value (ARV) accurately in wholesaling real estate. By understanding the extent of repairs needed and their associated costs, you can determine the true value of a property after it has been repaired and renovated. To ensure an accurate estimation of repair costs, it is crucial to use reliable comps and leverage market knowledge.

When estimating repair costs, it is helpful to gather information from comparable properties (comps) that have recently sold in the multiple listing service (MLS). These comps should be similar to the subject property in terms of condition, age, size, construction, style, and location. By analyzing the repairs undertaken in these comps and comparing them to the subject property, you can gauge the potential costs of the necessary renovations.

Additionally, it is important to stay updated on market trends and fluctuations that may impact repair costs. Understanding the current market conditions and the costs associated with labor and materials can help you make more accurate estimates. Keeping a close eye on local market data and consulting with experienced contractors or industry professionals can provide valuable insights into the expected costs of repairs.

Factors to Consider when Estimating Repair Costs:
Property size and square footage
Age and condition of the property
Type of repairs required (structural, cosmetic, etc.)
Local labor and material costs
Required permits and inspections
Timeline for completion of repairs

Accurately estimating repair costs is crucial for determining the ARV and maximizing your potential profits in the wholesaling real estate business. By utilizing reliable comps, staying informed about market trends, and considering all relevant factors, you can ensure a more accurate ARV calculation and make well-informed decisions when determining your maximum offer price.

Conclusion

Calculating the ARV is a crucial step in wholesaling real estate that requires finding comparable properties, determining the ARV using different methods, and accurately estimating repair costs. By following these steps, investors can make informed decisions and maximize their real estate investments.

To calculate the ARV, it is important to find comparable properties in the multiple listing service (MLS) that have recently sold and are similar to the subject property in terms of condition, age, size, construction, style, and location. Ideally, you should aim for three to six comps, preferably sold within the past 90 days.

There are two common methods for determining the ARV. The first method involves averaging the sales price of the comps, while the second method involves determining the average price per square foot of the comps and multiplying that by the square footage of the subject property. Both methods provide valuable insights into the potential value of the property.

When considering the maximum offer price, wholesalers and rehabbers often use the 70% rule, which suggests that the maximum offer price should be 70% of the ARV minus the estimated repair costs. However, some investors may deviate from this rule depending on the market conditions, going as high as 75%–80% of the ARV. It is important to accurately estimate repair costs and use reliable comps to ensure an accurate ARV calculation.

Furthermore, private and hard money lenders play a significant role in financing fix-and-flip projects. These lenders often consider the ARV when deciding on loan terms, with some lending up to 65% of the ARV. Therefore, accurately calculating the ARV is not only important for determining the maximum offer price but also for securing financing for real estate investments.

By following these steps and taking into account the importance of accurate ARV calculation, investors can make well-informed decisions and maximize their success in the world of real estate wholesaling.