When it comes to answering the question of how much you should spend on a fixer-upper home, we need to understand how to calculate the value of the property in its as-is condition before repairs.
First, we need to address the ARV, or the ‘after repair value.’ This describes how much a property will be worth once all updates and repairs have been completed. To find the max sales price, we take the ARV and subtract from it the cost of those repairs and updates, as well as any potential profit.
Conversely, when we sell a home that needs updates, it’s critical to understand how a buyer looks at such a property. In this case, we take a similar approach: We subtract any costs for the repairs needed and we also have to account for the profit someone is going to make on the house when we sell it. Buyers won’t typically buy a house that needs work without some kind of incentive to take on the extra work and risk.
To reiterate: The maximal sales price of a fixer-upper home is calculated by taking the ARV and subtracting from it the costs of repairs and the potential profit gained from selling the home.
If you have any questions about this topic, don’t hesitate to reach out to me. I’d love to dive into this a little deeper with you.