Hard Money Experts

ARV Loans Offer Financing Based on a Property’s ARV (After Repair Value)

ARV loans, also known as after-repair value loans, are loans used to finance the purchase and renovation of fix and flip properties. ARV loans are typically offered by hard money lenders, private money lenders, and other alternative lenders. The loan amount is based on the after-repair value (ARV). This is the property's estimated value after the repairs have been made. 

ARV loans offer borrowers a high degree of leverage, as they can often borrow up to 80% of the ARV (and sometimes up to 100% LTV) of the property. ARV loans are used to finance a wide variety of property types, including single-family homes, duplexes, triplexes, and quadplexes, as well as multifamily (5+ unit) and other commercial properties. 

It is important to note that, like traditional hard money loans, ARV loans often come with higher interest rates and shorter terms than traditional mortgages. Most ARV loans are interest-only balloon loans because a property is unlikely to generate significant income during rehab. As a result, they may not be suitable for all investors. Before deciding to use an ARV loan to finance a fix and flip project, it is important to consider the costs and risks involved.

• ARV: 70-80% max. 

• LTV: 90-100% max. 

• DSCR: Varies

• Interest Rate: 10-20% 

• Origination Fees: 2-6%

• Credit Score: Many lenders do not require credit checks. However, some lenders offer lower interest rates for borrowers with good credit. 

• Appraisal: Required required prior to funding. 

• Closing Timeline: Some lenders close in as little as 24 hours, while others may take between 3-4 weeks to close.

Pros:

• Often offer the highest leverage of any type of hard money loan.

• Typically have interest-only terms.

• Close quickly.

• Credit checks are often not required.

Cons: 

• Particularly high interest rates.

• Loan origination fees of between 2-6%.

• Loans are full-recourse.

Let’s say that an investor wants to purchase a single-family home for $150,000, put $50,000 of money into repairs, and sell it for an estimated after-repair value (ARV) of $275,000. The investor might take out an 70% ARV loan for $192,500, which would be slightly more than 96% LTV.

They would then put $7,500 cash down, pay loan origination fees (often 3-5%) of between $5,500-$9,500 and invest an additional $50,000 of their own capital into the project. If the interest rate was 12% and the rehab project took six months, after which the property was immediately sold, the borrower would pay $11,500 in interest over the life of the loan. 

In this case, the borrower would, before taxes, profit around $50,000 over the six-month period, not calculating additional purchase costs or taxes. However, this situation is extremely ideal, and, in reality, margins may not be nearly as high. If the market were to fall, the true ARV of the property may not actually exceed the pre-rehab value of the property. 

ARV is generally determined with an appraisal conducted by a third-party appraiser. 

Factors may include: 

• Location and appearance 

• Square footage

• Property condition, including water damage, mold, cracked walls/ceilings, etc.

• Number of bedrooms & bathrooms (for single-family and multifamily properties) 

Appraisals are generally done using “comps” or comparable sales, which look at recent sales of similar properties in the surrounding area. Since property values fluctuate quickly, appraisers generally look for properties that have sold within the last 3 months. 

A good appraiser may also give you an estimated value of repairs, though they (or you) may need to call contractors or subcontractors to determine individual prices. 

The 70 percent rule is a real estate investing rule of thumb that states that an investor should not pay more than 70% of the potential after-repair value of a property, minus the estimated repair costs. For example, if the after-repair value of a property was estimated to be $350,000, and the repair costs to get it there would be $75,000, an investor should not pay more than $192,000 for the property. 

The remaining 30% in the 70% rule gives the investor room for taxes, fees, closing costs, and enough to make a healthy profit. This quick rule gives an investor a good idea of how to determine the maximum offer price for a specific property. 

As previously mentioned, ARV loans have both pros and cons. On the plus side, ARV loans offer perhaps the highest leverage of any type of real estate investment property loan on the market today. ARV loan lenders often do not require credit checks or for the borrower to have real estate experience. Instead, the lender relies on property’s value (based on the appraisal) to serve as collateral for the loan.

In terms of cons, almost all private money loans, ARV loans have high interest rates and high origination fees, and are full-recourse loans, meaning that a borrower’s personal assets could be at risk if they default. Therefore, these loans should only be used by prepared fix and flip investors who know exactly what they are doing and have a strong plan to upgrade their property without going over budget quickly.