Investment Concepts
After Repair Value and the 70 Percent Rule
The percentages used in investor rules of thumb are conventions, not law, and they are adjusted for local carrying costs, financing terms and margin expectations. Treat every figure below as a method to apply to current local data rather than as a value to quote.
After repair value, usually shortened to ARV, is an estimate of what a property will be worth once a planned scope of work is finished. It is the number an investor underwrites a renovation against, and it is the number a rehab lender lends against, which makes it the single most consequential figure in a fix-and-flip file.
It is also the figure most often gotten wrong, because it looks like it should be arithmetic and is actually an appraisal problem. What follows covers how the estimate is built, the rule of thumb investors use to convert it into a maximum offer, and where the estimate goes off the rails.
What the Estimate Actually Measures
ARV is a forecast of market value in a finished condition that does not exist yet. The property being valued is the one that will stand on the lot after the work is complete, so the comparables must be properties already in that condition. Pulling comparables that match the subject as it sits today produces a distressed value, which is a different and equally legitimate number answering a different question.
The most common analytical error is treating the estimate as today's value plus the renovation budget. Markets do not refund construction spending line by line. A buyer pays what finished houses in that neighborhood are worth, and a kitchen that cost more than the neighborhood supports returns less than it cost. Two investors can spend very different amounts on the same house and arrive at the same ARV.
Work the estimate the way an appraiser would. Establish what finished properties of similar size, age, type and location have recently sold for, reduce that to a per-square-foot or per-unit basis, and apply it to the subject as it will be configured when the work is done. Then adjust for the features your scope will and will not deliver. The number that falls out is the ARV, and it is independent of the purchase price and of the construction budget.
Selecting the Comparables
The estimate is only as defensible as the sales behind it. Screen candidates against each of these before using them.
Finished condition matching the planned scope. A comparable renovated to a higher standard than you intend to build will overstate the result; one renovated to a lower standard will understate it. Match the level of finish, not merely the fact of renovation.
Recency. Use the most recent closed sales available and weight them more heavily than older ones. In a market that is moving, a sale from several quarters back describes a different set of conditions.
Closed sales rather than active listings. Asking prices record what sellers hoped for. If the segment is thin enough that closed data is scarce, note that in the analysis rather than quietly substituting listings.
Proximity and boundaries that matter to buyers. Stay inside the same neighborhood, and respect school attendance lines, municipal boundaries and physical barriers that buyers treat as dividing one area from another.
Comparable size and configuration. Wide swings in living area, bedroom and bath count or lot size require adjustments large enough to undermine confidence in the result. Prefer properties that need small adjustments.
Same property type and ownership form. Detached, attached, condominium and multi-unit properties draw different buyers and carry different ownership obligations, and they are not interchangeable in the analysis.
Arm's length transactions. Family transfers, foreclosure sales and other non-market conveyances are excluded for the same reason they would be excluded from an appraisal.
Converting ARV Into a Maximum Offer
How the rule is structured
The familiar version takes 70 percent of the after repair value and subtracts the estimated cost of the work; whatever remains is the ceiling on what the investor pays for the property. The 30 percent held back is not profit alone. It has to absorb acquisition costs, financing and carrying costs through the renovation period, brokerage and closing costs on the resale, and only then the margin that justifies the risk.
Worked illustration
Assume finished comparables support an after repair value of $260,000 and the contractor's scope prices out at $35,000. Seventy percent of $260,000 is $182,000. Subtracting the $35,000 scope leaves $147,000 as the maximum acquisition price. Paying above that figure does not make the project impossible, but every dollar over comes directly out of the cushion that was covering costs and risk.
How Lenders Use the Number
Renovation and bridge lending is underwritten forward rather than backward. Because the collateral is expected to be worth considerably more when the loan is repaid than it is at closing, these lenders size the loan against the projected finished value and release construction funds in stages as the work is inspected and completed.
The lender does not take the borrower's estimate on faith. It orders an appraisal performed subject to the proposed plans and specifications, so the appraiser reviews the scope of work and renders an opinion of value conditioned on that work being completed as described. That appraisal, not the investor's spreadsheet, is the number the loan is sized against, and a gap between the two is discovered at underwriting rather than at resale.
The lender also sets a maximum share of that projected value it will advance, which functions as its own risk cushion and varies by program and by borrower experience. For licensees, the practical point is that a client buying with this kind of financing is subject to a third party's opinion of the finished value, and a contract written without allowing for that review can fail for reasons unrelated to the borrower's credit.
Questions About After Repair Value
Is ARV the same thing as an appraised value?
Not in the ordinary sense. A standard appraisal reports value in the property's current condition. An appraisal performed subject to proposed improvements reports value conditioned on described work being completed, and that is effectively a formal ARV. Investors produce informal estimates from comparables for their own underwriting; lenders require the formal version from a licensed appraiser.
Why not simply add the renovation budget to the purchase price?
Because the market prices finished houses, not invoices. Money spent on items buyers in that price band do not value, or on a level of finish the neighborhood does not support, does not come back at resale. The comparables set the ceiling, and the budget only determines how much of the spread between acquisition and that ceiling survives as profit.
How wide should the margin of error be?
Wide enough to absorb both an estimating miss and a market move during the renovation period, and wider when the project will take longer or when comparable data is thin. Investors commonly carry an explicit cushion on the value estimate and a separate contingency on the construction budget, because the two risks are independent.
Does the 70 percent figure ever change?
Frequently. It is a convention that bundles costs, carrying time and target margin into one number, so it moves when any of those change. Higher financing costs, longer permitting timelines, thinner resale margins or a less experienced crew all argue for a lower percentage. Investors in competitive markets sometimes work above it and accept the reduced cushion knowingly.
May a licensee give a client an ARV figure?
You can prepare and present a comparative market analysis, including one modeled on a finished condition, and investors routinely ask agents to do exactly that. What you cannot do is present it as an appraisal or imply appraiser credentials you do not hold. Label the work for what it is, and refer the client to a licensed appraiser when a formal opinion is required.