If you’re planning to renovate your home or buy a fixer-upper, one important figure to understand is the after-renovation value (ARV). ARV estimates what your property will be worth once improvements are complete, helping you set a realistic renovation budget and decide whether an ARV loan makes sense.
Stay tuned to learn about ARV meaning in real estate, the factors that influence it, and common mistakes to avoid when using it to guide your renovation plans.
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What is ARV in real estate?
After-renovation value, or after-repair value (ARV), is a property’s estimated market worth after planned improvements. Your home’s as-is value reflects how much it’s worth in its current condition. Meanwhile, ARV gauges your property’s resale value after you complete planned upgrades like replacing the roof or overhauling the kitchen.
As a homeowner, you’ll rely on ARV to decide whether a home improvement project makes sense financially. Real estate investors may use this number to determine how much they could earn from buying, sprucing up, and selling property (what’s known as house-flipping), while lenders may consider this figure when evaluating applications for renovation loans.
How do you calculate ARV?
The basic ARV formula is:
Property’s Purchase Price/Current Value + Value of Renovations
To evaluate a home’s current and potential value, you’ll look into similar properties in the same area (known as “comps”). Keep in mind that ARV isn’t a hard number, but rather an estimate (more on this below).
How to calculate ARV: an example
Let’s say your home’s current market value is around $250,000. It needs several upgrades, like a kitchen remodel, a bathroom upgrade, and an exterior repaint. You estimate that a budget of $50,000 will cover the necessary renovations.
When you look at local listings, you see that comparable homes with the upgrades you’re planning (i.e., a modern kitchen and bathroom and fresh exterior) sell for around $325,000. Thus, your ARV would be:
$250,000 + $75,000 = $325,000 rather than $300,000 ($250,000 + $50,000) since the improvements add more market value than what you had paid for them.
Why does ARV matter?
ARV serves as a checkpoint when you’re setting your renovation budget. It helps you avoid pouring a lot of money into upgrades that don’t pay off when you’re planning to put your property on the market.
Scenario 1
You believe an in-ground swimming pool will boost your home’s resale value. However, while installing a pool would cost $60,000, properties similar to yours with an added swimming pool sell at only around $30,000 more than your home’s current value.
You may still choose to build a pool to use and enjoy, but know that from an ARV perspective, you likely won’t recoup the project’s cost when you sell your home.
Scenario 2
You want to improve your home’s curb appeal as you list it for sale. You notice that comparable local homes with stylish, modern decks sell for around $25,000 more. Building a deck would cost about $15,000. Based on ARV, that’s a smart investment, since the deck would likely increase your home’s value beyond its raw cost.
What influences ARV?
ARV isn’t a set number, but rather an estimate based on:
- The property’s present condition, which influences how much value renovations could potentially add
- The planned renovations’ scope, i.e., minor fix-ups vs. major structural upgrades
- Comparable local properties—we recommend cross-checking at least three comps in your neighborhood
- Real estate trends, e.g., rising or declining home prices, zoning changes, or local development plans
- Interest rates, which impact affordability and buyer demand
If you consider high-cost renovations, a professional like a real estate agent or a home appraiser could help refine your ARV estimate.
Avoid common mistakes when estimating ARV
Overestimating ARV is a common pitfall. When evaluating ARV, it’s better to err on the lower side rather than run into:
- Hidden repair costs: You begin electrical upgrades and discover you need to replace more drywall than you had estimated.
- Market fluctuations: A slowdown in the local real estate market reduces the price buyers are willing to pay.
- Renovation delays: Your project takes longer than you expected, causing you to miss the most favorable time of year for selling your home.
When would you use an ARV loan?
An ARV loan is a financing option that allows homeowners and real estate investors to borrow based on the property’s prospective value after renovations, rather than its as-is value. This type of loan is especially useful when you plan major home upgrades or buy property intending to resell it quickly.
As a homeowner, you may need to complete extensive renovations, like a kitchen and bathroom upgrade, before the prime selling season (typically spring and early summer). An ARV loan lets you borrow against the estimated post-renovation value, possibly allowing you access to a larger amount than a standard home equity loan would provide.
If you’re a real estate investor, you could use an ARV loan to renovate a fixer-upper. A loan would provide the large amounts of cash you’d need to complete the upgrades and reenter a property into the market quickly.
RenoFi is a platform that connects property owners to lenders willing to extend borrowing thresholds based on a home’s prospective value. Rehab Financial Group and Lima One Capital, both direct lenders, offer fix-and-flip loans to residential real estate investors.
Consider the risks of ARV loans
While ARV loans can be a useful financial tool, they aren’t risk-free. Consider the following potential downsides:
- An overoptimistic ARV estimate makes it easy to overborrow, leaving you short when it’s time to repay.
- Renovation projects might cost more than expected, shrinking your profit margin.
- A dip in the real estate market could lower property values, making it difficult to sell at the price you anticipated.
Always plan and borrow conservatively, with enough budget flexibility to absorb losses.
Alternatives to ARV loans
Apart from ARV loans, you may also consider other financing options for renovations, such as:
- Home equity loans (HELs) usually come with fixed rates and predictable payments, but also typically require you to own at least 20% equity in the property.
- HELOCs are a flexible borrowing choice for phased renovations, but you may have to deal with fluctuating interest rates.
- Cash-out refinance is an option for large amounts, but it’s important to know it restarts your mortgage term.
- A personal loan could provide quick funds for a small remodel, if you’re willing to tolerate high interest rates and a shorter repayment term. Check out our recommendations for the best home improvement personal loans if that’s a route you’re exploring.
ARV shows what your home may be worth after a remodel. While not precise, this number can help you plan renovations, set a budget, and decide whether you should go for an ARV loan. Consider ARV if you’re a homeowner looking to boost your home’s value or a real estate investor seeking maximum return on investment. Just remember: borrow with care to avoid financial stress.