Within real estate and renovation loans, after renovation value (also known as after repair value) is the value of a home after you’ve completed renovations.

It takes into account the total cost of your updates and the current value of the home. This is one of the most important terms to understand when it comes to qualifying for renovation loans.

Your property’s after renovation value is important to consider when you’re thinking about making changes - it determines your borrowing power if you’re applying for a loan. Renovation loans like RenoFi Loans, FHA 203ks, Fannie Mae Homestyles, construction loans, and more are based on the ARV.

But even outside of that, most people who renovate their homes want to know that they’re going to get a good ROI, especially if they’re buying a fixer upper or if they’re a real estate investor flipping homes. 

If you’re paying a lot of money to get a home addition, new kitchen, or ADU, you want to know that your home is going to increase in value. 

We’ll dive in and explain everything you need to know about after renovation value, including how to calculate it, when to use it, and things to keep in mind when using ARV as a homeowner.

What Is After Renovation Value (ARV)?

ARV, when it comes to renovation loans, is a defined value determined by an “as-completed” appraisal. However, many homeowners or real estate investors will also approximate the ARV through taking an estimate of a home’s current value and adding the cost of renovations. 

This value can be hard for the average homeowner to gauge, because generally you won’t get a 100% ROI from most renovation projects, ie., your future home value will be slightly less than the cost of your repairs plus the current value. 

At RenoFi, we estimate that on average, most projects get a 70% ROI - but it heavily depends on the type of project and location. 

To apply for a renovation loan, you can’t just use an estimate you came up with yourself, you’ll need the value determined by an appraiser during the “as-completed” appraisal of your home and renovation plans. 

How to Calculate ARV

Like we mentioned, in essence, you can estimate your ARV with this formula:

Estimated Current Home Value + (70% x Cost of Renovations) = ARV

(Remember, the 70% rule is a guideline stating that, on average, renovations return 70% of your initial investment, so you probably won’t get back the total cost of the remodel.)

Here’s a quick example: Say you recently purchased your house for $450,000, and you’re remodeling your kitchen. Your estimate from the contractor for the project is $50,000. 

Your estimated ARV would be: $450,000 + (70% x $50,000) = $485,000.

However, it’s important to remember that appraisers use a specific method to calculate your official after renovation value that’s much more in-depth. While you can guess at what your ARV would be, official ARV calculations are the only ones that count when it comes to applying for a renovation loan.

An appraiser’s ARV formula is based on a variety of factors:

  • Property Location

  • Square Footage of House

  • Sales Comps of Recently Sold Neighborhood Homes

  • Proposed Renovation Plans

  • Cost Estimate From Contractor

    • Material Cost
    • Labor Cost
  • Purchase Price

  • Photos

  • And More…

Using these factors, your appraiser has a standard formula to determine your after renovation value before you even get started - solely based on your current home and your upgrade plans. 

How the After Renovation Value (ARV) Works

Before applying for a renovation loan with any lender, you’ll be required to order an “as-completed” appraisal, which will determine your property’s ARV. 

These appraisals are quite different from “as-is” appraisals, where appraisers are just looking at the current condition of the home. 

With “as-completed” appraisals, appraisers are mostly focused on detailed renovation plans and their budget breakdowns, trying to evaluate exactly how much value each portion of the project will add value to the property. 

The appraiser will also look at several “comps” of homes that have recently sold in your neighborhood, and compare them to your home to make a judgement. These are ideally homes that are similar in age, size and square footage to your home after the renovation.

Then, the appraiser will get back to you with your official ARV. Renovation loan lenders require this official appraisal and ARV determination to apply for a loan, and will use this number to determine your maximum borrowing power. 

Constraints of the After Renovation Value (ARV)

Calculating an ARV, even for seasoned appraisers, is an art, not a science. Two appraisers could sit down and evaluate the same home, same renovation plans, and same comps, and come up with two different values. 

This can be frustrating to homeowners, as thousands of dollars in borrowing power for a renovation loan can hinge on this value and this decision. 

Not to mention, this value is also dependent on the housing market, which constantly changes. Because it’s based on “comps” sold recently, short term price fluctuations will affect your ARV. 

The quality and detail of your submitted documents can also heavily influence your ARV. If certain details aren’t included or specific enough, your appraiser may not be able to fully evaluate the increase in value. This is often conditional on the documents your contractor submits, like the budget breakdown, renovation contract, and renovation plans. 

One important thing to note is that if you carry out your proposed renovations, the ARV determined by your appraiser before construction will stay relevant after the renovation. 

If you get your required certificate of completion from an inspector that verifies that you completed your renovation, that ARV will hold true and you won’t need another appraisal. 

Therefore, when you get your ARV before applying for a loan, you can have the peace of mind that as long as your plans are carried out, your home will likely be worth that amount in the near future.

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