How After Repair Value Works on a Flip

After repair value is what a property will be worth once the work is finished. Every other number in a flip is derived from it — the maximum purchase price, the renovation budget, the loan size, the profit.

It is also an estimate of a future sale in a market that has not happened yet, which makes it the single largest source of error in the whole exercise.

The formula, and what the discount is for

The standard approach works backwards from the after repair value:

Maximum purchase price = after repair value × 70% − renovation cost.

The 70% is not arbitrary. It is a placeholder covering everything between the sale price and your pocket:

Selling costs — agent commission, transfer taxes, closing costs — which typically consume a meaningful share of the sale price on their own.

Holding costs — loan interest, property tax, insurance, utilities — accruing every month you own it.

Purchase closing costs.

Contingency, because renovation budgets overrun.

Profit.

Note what that means: the margin people call profit is the last item in the list, after several categories of cost that are frequently underestimated. A flip that ran two months long and had a 20% budget overrun has usually consumed the profit entirely without anything dramatic happening.

The flip ARV calculator works the arithmetic in both directions. The percentage should be adjusted for your market: tighter in expensive markets where the same margin is a larger absolute sum, wider where sales are slow.

Estimating after repair value from comparables

The after repair value comes from comparable sales, and the discipline around what counts as comparable is where the estimate is won or lost.

Sold, not listed. Asking prices are opinions. Only closed sales are evidence.

Recent. Within a few months. Older sales describe a market that may have moved.

Nearby. Same neighbourhood, and critically, same side of any boundary that matters — school catchment, main road, flood zone. Half a mile can be a different market.

Similar size, age and layout. Adjustments for differences are where estimates drift optimistic.

Similar condition. The comparable must be a renovated property, since you are estimating the value of a renovated property. Comparing against unrenovated sales understates it; comparing against new construction overstates it.

The most common error is selecting comparables that support a purchase you already want to make. The check is to ask what an appraiser would pick — and better, to ask an agent who works the area what it would sell for, described honestly, before you commit.

Also look at days on market for those comparables. A neighbourhood where renovated properties sell in a week and one where they sit for three months have very different holding costs, and the difference lands entirely in your margin.

The ceiling that limits what work is worth doing

Every neighbourhood has a price above which buyers do not go, regardless of finish. Work that pushes a property past it does not return its cost.

This makes the renovation decision narrower than it appears. The question is never "what would improve this property" but "what raises the appraised value in this specific market."

Work that generally pays: kitchens and bathrooms to the standard of the comparables, systems and roof where they would fail an inspection, flooring, paint, and anything that moves the property from a poor condition category to a normal one. Curb appeal, cheaply.

Work that generally does not: finishes above neighbourhood norms, layouts that suit your taste, pools in most markets, and additions where the cost per square foot exceeds the value added.

The rule is to renovate to the comparables, not beyond them. A property finished to the market standard sells; one finished above it sells at the market standard anyway.

Where flips actually lose money

Renovation overruns. The most common. Opening walls reveals problems, and older properties reveal more of them. Budget a real contingency — a fifth of the scope — and treat it as expected rather than as insurance. The contractor estimate guide and the change order guide cover keeping scope from drifting.

Time. Holding costs accrue monthly and are invisible in the purchase decision. A flip budgeted for four months that takes eight has doubled them, and short-term financing is expensive. Permitting delays are the usual cause and are outside your control.

Market movement. You buy at one moment and sell at another. In a softening market the after repair value estimated at purchase may not exist at sale, and that risk grows with every month the project runs.

Tax. A flip is generally ordinary income rather than a long-term capital gain, and if you do it repeatedly it may be a trade, bringing self-employment tax with it — the self-employment tax calculator covers the difference, which is large enough to change whether a project was worth doing. The cost basis guide covers what improvements add.

The lowest bid. Choosing a contractor on price is how projects stall midway, and the lowest bid usually costs the most.

Being honest with the estimate

Three habits separate estimates that hold from estimates that do not.

Underwrite the after repair value conservatively, then test whether the deal still works if it comes in below. If the project only works at the optimistic figure, it does not work.

Model a longer timeline than you expect and see whether the holding costs are survivable.

Have an exit that is not selling. If the market turns, can the property be let and held? A flip that can become a rental has a floor — the rental cash flow guide covers what that requires, and the BRRRR guide covers doing it deliberately. A flip with no alternative exit is a bet on a sale price several months out, which is a considerably riskier proposition than it usually gets described as.