When a lender decides your loan-to-value amount, what is ARV?
The first number to know in a fix and flip loan is called ARV, or after-repair value. This is the amount you could sell the property for after it’s been fixed up.
Why is this number so important? While loans on regular properties are based on the purchase price, fix and flip lenders loan based on the ARV.
For example, most fix and flip lenders in this market lend 70% of the ARV. As an example, on a property with an ARV of $200k, you could get $140k in your fix and flip loan (aka, 70% of $200k).
On a property that will be worth $500k after rehab, you could likely get a maximum of $350k on a fix and flip loan.
What Is ARV’s Other Requirements for Fix and Flip Loans
Generally, the loan you get is based on LTV. However, that doesn’t mean that’s the exact amount the lender is going to give you.
In a fix and flip, there are two major costs: the purchase price and the rehab costs. How much the property is and how much it will take to fix it up.
Your fix and flip loan will cover a certain percentage of these two costs.
For example, in this market, if you’re a seasoned investor, they’ll lend you 85% of the purchase and 100% of rehab. This means that with any project, you’ll have to find a way to fund a 15% down payment on the purchase. But the fix and flip loan will pay for all the rehab.
As a quick example, let’s look back at that $200k ARV house. The lender will give you 70% of that amount (so $140k), but they’re still restricting purchase to 85% and rehab to 100%.
So this example might play out like this:
- ARV: $200k
- Maximum LTV: $140k
- Actual as-is purchase price: $120k
- Rehab budget: $20k
- Actual LTV for purchase: $102k
- Actual LTV for rehab: $20k
- Total actual LTV: $122k
- Amount needed for down payment on purchase: $18k
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