After-repair value is the price a house will realistically sell for once renovations are finished and it’s listed to a retail buyer. Every other number in a flip depends on it: the offer you make, the loan you qualify for, and whether the project earns a profit or drains one. The standard screening formula, the 70% rule, says pay no more than 70% of the after-repair value minus repair costs. Miss the ARV by 5%, and a deal that looked healthy can lose tens of thousands.
What ARV Actually Means
ARV is not a forecast. It’s what the local market is paying today for a fully renovated, move-in-ready home comparable to the one you’ll deliver. It is not a hoped-for price six months out, and it is not the current as-is value of the distressed property in front of you.
The gap between as-is value and ARV is where profit lives, and it’s also where risk hides. Private and hard money lenders base their loan-to-value ratios on ARV, so an inflated number doesn’t just mislead the investor; it can cause financing to fall apart mid-project. A lender offering 70% of ARV is betting the finished property would cover the loan even if the borrower walked away halfway through. That’s why the ARV has to come from the market, not from the pro forma.
Choosing Comparable Sales
The accuracy of any ARV estimate depends almost entirely on the comps. Comparable sales are recently sold homes that resemble what your property will look like after renovation, not what it looks like now. You’re looking for finished homes a buyer would consider as alternatives to yours once the work is done.
Fannie Mae’s appraisal guidelines require comparable sales to share similar physical and legal characteristics with the subject property, including room count, finished area, style, and condition. Sales from within the same market area are preferred and sometimes required. When immediate-neighborhood sales aren’t available, appraisers can use sales from competing neighborhoods but must explain the choice and adjust for location.1Fannie Mae. Fannie Mae Selling Guide – Comparable Sales
In practice, most investors aim for three to five comps within roughly a mile of the target property, sold in the last three to six months. Those are rules of thumb, not hard limits. A sale 1.3 miles away in the same school district often tells you more than one half a mile away across a district boundary. What matters is whether the comp would compete for the same buyers your finished property will attract.
Pull comps from the MLS or public property records and focus on sale price, square footage, bedroom and bathroom count, lot size, year built, and condition at sale. MLS photos matter too: they reveal the finish level the comp actually sold at, which is the difference between $310,000 buying granite and hardwood or laminate and builder-grade fixtures.
Calculating After-Repair Value Step by Step
Start with the average price per square foot across your comps. If three comps sold for $300,000 (1,500 sq ft), $310,000 (1,550 sq ft), and $320,000 (1,600 sq ft), the average is roughly $200 per square foot. Multiply by your subject property’s square footage. A 1,525-square-foot house gives a baseline ARV around $305,000.
Raw averages only get you partway. If your finished property will have a feature none of the comps have, such as a finished basement or an extra full bath, add value. If a comp has something yours won’t, like a two-car garage where yours has one, subtract. Appraisers call these contributory value adjustments, and they come from market data, not from what you spent. What matters is how much more buyers pay for that feature in your specific market.
The cleanest way to isolate a feature’s value is a paired sales analysis: two nearly identical sales that differ in one feature. If a three-bedroom sold for $295,000 and an otherwise identical four-bedroom across the street sold for $315,000, the market is telling you a bedroom is worth about $20,000 there. When paired sales aren’t available, appraisers fall back on statistical modeling or cost-based estimates adjusted for depreciation.
Applying the 70 Percent Rule
The 70% rule is the standard screening formula for the maximum you should offer on a distressed property. Multiply ARV by 0.70, then subtract estimated repair costs. That’s your maximum allowable offer.
For a property with an ARV of $400,000 and $50,000 in repairs: $400,000 × 0.70 = $280,000, minus $50,000, giving a maximum offer of $230,000. The 30% spread between ARV and your all-in cost is meant to cover profit, closing costs on both the purchase and the sale, and the holding costs that build up during renovation.2Fannie Mae. Closing Costs Calculator
The rule works as a quick filter, but it’s a blunt one. In expensive coastal markets where deals are scarce, experienced investors sometimes accept 75% or even 80% of ARV, trading margin for volume. In slower markets with longer hold times, 65% may be more appropriate. The 70% figure assumes a three-to-six-month renovation, closing costs around 2% to 5% of the sale price, and a hard money loan.
Beginners treat the 30% cushion as guaranteed profit. It isn’t. Unexpected repairs, permit delays, and shifting market conditions all draw from it. The rule gives you a buffer, not a promise the buffer will be enough.
Holding Costs the ARV Has to Cover
Every month a property sits unfinished, it costs money. Holding costs are separate from renovation expenses, and beginners consistently underestimate them because they focus on purchase and rehab while ignoring the calendar.
- Loan interest. Hard money loans commonly carry rates between 10% and 18%, plus one to three points in origination fees. On a $230,000 loan at 12%, interest alone runs about $2,300 per month.
- Property taxes. Prorated from the annual bill; commonly $300 to $800 per month depending on location.
- Property insurance. A standard homeowner’s policy won’t cover a vacant renovation. Vacant property insurance runs about 50% to 60% more than standard coverage, typically $100 to $350 per month.
- Utilities. Contractors need power, water, and often climate control. Budget $200 to $400 per month.
- Maintenance. Lawn care, snow removal, and upkeep to avoid code violations. Budget $50 to $100 per month.
On a mid-price flip, holding costs alone can reach $3,000 to $4,000 per month. A two-month delay isn’t just two extra months of interest; it’s two extra months of every line above, plus exposure to any market shift that happens in the meantime.
When the Buyer’s Appraiser Disagrees
Your ARV can be sound and still get contradicted at closing. The buyer’s lender hires its own appraiser, and if that appraisal comes in below the contract price, the lender will only finance based on the appraised value. The shortfall is the appraisal gap, and it’s one of the most common deal killers in flipping.
List at $310,000, get an appraisal at $290,000, and the buyer either brings $20,000 in cash to closing or the price renegotiates down. In competitive markets, some buyers include an appraisal gap clause committing to cover a set shortfall out of pocket; from the seller’s side, those offers are often more reliable than higher-priced offers without one.
The best defense is doing the ARV work with strong comps in the first place. Hand the buyer’s appraiser a packet of three well-chosen comparable sales that support your price, and you’ve done most of the work for them. Appraisers aren’t hostile to your number; they need defensible data to support it.
Local Market Signals That Move ARV
Comparable sales tell you where the market has been. Local conditions tell you whether the ARV will hold through your renovation timeline.
Absorption rate in the target zip code measures how quickly homes sell relative to available inventory. A low absorption rate, meaning many months of inventory, means homes sit longer and you may need to price below your ARV to move the property. A high absorption rate under two or three months suggests a seller-friendly market where a renovated home may attract multiple offers.
School district quality is one of the strongest price drivers in residential real estate; homes in higher-rated districts sell for meaningfully more than comparable homes in lower-rated districts within the same metro. If the property sits near a district boundary, a few blocks can create a price difference comps from the wrong side won’t capture. New commercial, park, or transit development nearby tends to lift values, while a concentration of foreclosures in the immediate area can suppress prices for renovated homes.
Rules That Change the ARV Math
A few outside rules can quietly break an ARV calculation if you don’t plan for them.
FHA 90- and 180-Day Resale Restrictions
Federal regulations prohibit FHA-insured mortgages on properties resold within 90 days of the seller’s acquisition. Roughly 15% to 20% of home purchase loans are FHA-backed, so a quick relist cuts out a real segment of your buyer pool.3National Archives. Prohibition of Property Flipping in HUDs Single Family Mortgage Insurance Programs
Between 91 and 180 days, additional scrutiny applies. If the resale price is 100% or more above what you paid, FHA requires a second independent appraisal at the seller’s expense. If that second appraisal comes in more than 5% below the first, the lower value controls, which can kill the buyer’s financing.4U.S. Department of Housing and Urban Development (HUD). FHA Single Family Housing Policy Handbook 4000.1
Exemptions exist for properties acquired from HUD, nonprofits, and government-sponsored enterprises, but they don’t apply to typical investor-to-investor purchases. Build the timeline into the project plan.
Lead Paint on Pre-1978 Homes
Any renovation on a home built before 1978 triggers the EPA’s Renovation, Repair, and Painting Rule. Work disturbing lead-based paint must be performed by lead-safe certified contractors, and the EPA states explicitly that the rule applies to anyone who buys, renovates, and sells homes for profit.5U.S. Environmental Protection Agency. Lead Renovation, Repair and Painting Program Violations carry fines up to $46,192 per day per violation, and lead abatement adds both cost and time to the rehab. If you don’t build it into the repair estimate, the 70% rule calculation is already off. On a pre-1978 property, assume lead is present until testing proves otherwise.6U.S. Environmental Protection Agency. Lead-Safe Renovations for DIYers
Dealer vs. Investor Tax Status
How the IRS classifies your activity determines whether flip profits are taxed at capital gains rates or ordinary income rates. If flipping is your business, you’re a dealer in the IRS’s eyes, and your properties are inventory rather than capital assets.7Office of the Law Revision Counsel. 26 USC 1221 – Capital Asset Defined8Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment9Internal Revenue Service. Self-Employment Tax Social Security and Medicare Taxes The IRS looks at the full picture, including frequency of flips, holding period, intent at purchase, and source of income. On a $75,000 profit, the difference between dealer treatment and investor treatment can approach $18,000 in tax. Run the after-tax number, not just the pre-tax spread, when deciding whether the deal pencils.
The math on ARV is the easy part. Reading the comps carefully, budgeting the holding costs honestly, and knowing which outside rules bite into the schedule is where the number actually holds up.