Loan-to-After-Repair value

IN THIS GUIDE

What is After-Repair-Value (ARV)?

ARV is the estimated value of a property after being renovated and stabilized. This estimated value is higher than the purchase price as the investor expects the properties market value to appreciate after adding value to the property.

How to calculate the after-repair value (ARV)?

ARV = (Fix and Flip Value) + (Profit)

How to calculate the fix and flip value (FAFV)?

FAFV = Purchase Price + Cost of Repairs

How to effectively use the after-repair value?

The 70% rule implies that investors expenditures shouldn’t exceed more than 70% of the after-repair value of the property. This rule allows the investor keep 30% of the after-repair value. Investors will benefit tremendously from this rule as it will allow them to achieve a robust return on investment, while, leaving room for unexpected renovation expenses that may have not been predicted.

Why do lenders analyze the after-repair value?

This metric allows lenders to see the acquisition price, how much renovations will cost, and the as-stabilized value of the property. Private lenders also use ARV to estimate the maximum amount they can loan an investor for them to renovate the property

Investor benefits of using the ARV to size loans

  • Higher net proceeds
  • Loan amount is based on the future value and not the current value
  • Provides lender with a great scope of the project

Lender benefits of using the ARV to size loans

  • Greater origination fee
  • Greater scoop of the project
  • Point of differentiation as not all lenders size loans based on the after-repair value
  • Requires the borrower to be prepared with a project timeline and detailed budget

What are commons mistakes made when using the ARV? Overestimating profit

Investors need to make sure they have a strong list of comparables of properties like theirs as it’s very easy for investors to overestimate the properties potential market value.

Underestimating costs

The after-repair value of a fix and flip project should leave room for error such as the 70% rule states. Buying distressed properties can come with unexpected damages which means a property may require additional rehab expenses than expected. This mistake will increase the fix and flip value, decrease the profit, decrease the after-repair value, and increase the probabilities of loosing money on a fix and flip deal.
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