What Is ARV and How Does It Affect My Fix-and-Flip Loan?

What Is ARV and How Does It Affect My Fix-and-Flip Loan?

If you’re new to fix-and-flip investing, ARV is the number you need to understand before you run any deal.

Get it right, and your financing makes sense. Get it wrong, and you either overpay for a deal or underestimate what you can borrow.

What is ARV?

ARV stands for After-Repair Value. It’s the estimated market value of a property after renovations are complete — not what it’s worth today in its current condition.

This is the number fix-and-flip lenders underwrite against. They’re not lending based on what the property is worth right now. They’re lending based on what it will be worth when the work is done.

How is ARV calculated?

ARV is established through a comparable sales analysis — the same method appraisers use. You look at properties in the same area that have sold recently, that are similar in size, condition, and features to what your property will look like post-renovation.

Most lenders require a formal appraisal that includes an ARV estimate. Some will also accept a broker price opinion (BPO) for smaller deals.

Your ARV needs to be defensible. Lenders will scrutinize the comparables. If you’re reaching for a high ARV using sales that don’t really match the subject property, an underwriter will push back.

How ARV affects your loan amount

Fix-and-flip lenders typically lend up to 65 to 75 percent of ARV. That percentage — called loan-to-ARV or LTV on a completed basis — is the ceiling for your total loan.

Example:

•      ARV: $280,000

•      Lender maximum at 70% ARV: $196,000

•      Purchase price: $155,000

•      Renovation budget: $50,000

•      Total project cost: $205,000

•      Gap you need to fund: $205,000 − $196,000 = $9,000 out of pocket (plus closing costs)

The higher the ARV relative to your total project cost, the less cash you need to bring in. That’s why accurately estimating ARV before you make an offer is one of the most important skills in fix-and-flip investing.

Common mistakes investors make with ARV

•      Using active listings instead of closed sales. Listings are asking prices, not what buyers actually paid. Lenders use sold comparables.

•      Pulling comps from too far away. In many markets, neighborhood boundaries matter. A sale three blocks over in a different submarket isn’t a clean comp.

•      Overestimating renovation quality. If comparable sales were full gut renovations with high-end finishes and yours is a mid-grade rehab, the ARV needs to reflect that.

•      Not accounting for time. If comps are from 12 months ago in a declining market, today’s ARV may be lower.

How to use ARV before you submit an offer

Run the ARV analysis before you make an offer — not after. Once you know the ARV, back into your maximum purchase price:

Max purchase price = (ARV x lender LTV) − renovation budget − estimated closing costs − profit target

This keeps you from overpaying on the front end.

Want help running the numbers on a deal?

I work with fix-and-flip investors nationally. If you have a property you’re evaluating, I’m glad to walk through the ARV and financing structure with you.

Visit endeavance.com to get started or take our free Fundability Scorecard at endeavance.com/scorecardoptin.