Tag Archive for: ARV

What Is ARV? (And How Does It Impact Real Estate Deals?)

How does value-add property investing work? And what is ARV?

After-repair value (or ARV) is one of the biggest concepts used in real estate investing.

Let’s talk about what ARV is and how to calculate it.

Value-Add Real Estate Investing

The type of real estate investing we specialize in involves value-add properties.

This means you buy properties at a lower price, change them in some way, then sell for more. This could look like:

  • Splitting up a rental into multiple units
  • Adding a bedroom
  • Doing needed repairs and renovations
  • Etc.

The property’s value at the end of your project will be more than the price you originally bought it for.

That higher ending value is referred to as the after-repair value. This value is decided by either: 1) what it can sell for on the open market, or 2) what it will appraise for (if you’re going to hold the unit as a rental).

How to Estimate ARV

All of the financials of a value-add real estate investment are dependent on the ARV. How do we decide the ARV number? Well, it’s really just an educated guess. Let’s go over some of the key factors used in estimating an after-repair value.

The Amount of Work and Quality of Work

The work you put into a property is what adds the value. So, how you’re changing the property is a good indicator of the ARV.

For example, adding a bedroom or granite countertops will impact the future value more than just a fresh coat of paint.

However, the planned work can’t be the only thing ARV is based on. After all, you can’t guarantee the quality of work will really turn out to be worth it. So there’s another important factor in estimating ARV.

Comparing to Similar Properties

To make our estimate slightly more accurate, we’re going to look at properties that are just like yours but finished. Here are the criteria you’ll use to calculate ARV with comps:

  • The same subdivision. Comp properties, at most, should be within a half mile of your property.
  • The same size. What’s the square footage? Don’t compare a 1,200-square foot place to a 2,000-square foot place.
  • The same condition. What will your property look like when it’s finished? Look at other properties that already look like that.
  • Sold within the last 3-6 months. It’s not accurate to use the list price for a property that hasn’t sold yet. You can only guarantee the actual value of a property when it’s been purchased in your market.
  • Sold without concessions. Concessions mean the seller is helping the buyer purchase the property. Some sellers will contribute anywhere between 3% and 6% of the sale price to help the buyer cover closing costs (especially in a FHA or VA market). This is important to watch out for in comps, because if a house sold for $200k with a 5% seller concession, then the seller was really only able to sell if for $190k.

Market Conditions

We usually have a ballpark idea of what the market will look like in the next 6 or so months. This is important to factor into your ARV.

For example, 2022 saw a market decline after May. So, if you were comping out a property in June of 2022, you’re expecting the market to get worse, so you factor that in. Maybe you take another 5-10% off the ARV you calculated based on comps to set a realistic expectation for the future market.

Why Is ARV So Important?

When you’re calculating the ARV of the property, remember to be truthful with yourself. Work with comps to get a full picture of your actual after-repair value. Fudging these numbers only hurts you.

ARV has a direct impact on the amount you can get from a lender. Accurate after-repair value is important to your investing financials. You can read about how ARV affects LTV here.

You can also use this free tool to calculate your lendable amount on a property based on ARV.

As always, reach out to Info@HardMoneyMike.com with any questions.

Happy Investing.

70 Percent ARV: Why Can’t I Get More for My Real Estate Deal?

The real reason your fix and flip lender won’t give you more than 70% ARV…

One thing new investors ask all the time:

Why do lenders only lend 70 or 75%?

Let’s go over the numbers and see how lenders come up with that 70% number.

What Is ARV and the 70% Rule?

The number we’re talking about is what percentage of the after-repair value (ARV) a lender will give you.

The ARV is what you can sell a property for after flipping, or what it can be appraised for on a refinance for a BRRRR rental.

Here’s an example of what a 70% ARV might look like:

You buy a property. The market shows it will sell for $200k after it’s fixed up. If your lender offers 70% of the ARV, that’s the maximum amount your loan could be. In this case, 70% of $200k is $140k. So you can get up to $140,000 as a loan when you buy this property.

So that’s $60k worth of value that’s not being covered. This is where investors ask the question… There’s still a lot of money here. Why can’t I borrow against that extra $60,000?

Let’s dive into why lenders stop at 70%.

Why Do Lenders Stop at 70% ARV?

If lenders stop at 70% of the ARV, what happens to the remaining 30%?

Profit

First, is profit for you. Why do you invest in real estate? Because you want to make a profit. And if you don’t factor in profit at the beginning of your deal, there’s not going to be any leftover for you.

So as lenders, we build in a 10-15% profit margin for you. Let’s say on average, it’s 12.5%. That amount comes from the 30% of the ARV not covered by your loan. 

In our example $200k property from earlier, 12.5% is $25,000, which will be profit for you at the end of the project.

Realtor

There are a few other people involved in this process, especially on the selling side.

When you bring in a realtor, you can expect to say anywhere between 4.8% and 6%. To keep it easy, we usually estimate 5%.

So of your ARV, we’ve already taken up 17.5% between your profit and your realtor.

Closing Costs, Cost of Funds, and More with a 70% ARV

Closing costs vary, but it’s safe to assume they will cost 1.5%.

With all the costs so far, we could be looking at anywhere between 17% and 22%, but an average of 19% total.

After you’ve purchased the property and started fixing it up, there will be more costs. Two major areas that should be factored into your budget are interest on your loan and a general overage budget.

Between these extra costs, we’re sitting at an average of 29%…

Which is exactly why lenders leave 30% of the ARV off of the loan they give you.

Making Sense of a 70% ARV

With real estate investing, the money’s in the money. Understanding and feeling comfortable with the numbers is the fastest way to start getting into great deals.

You don’t want to get into a deal that won’t be profitable for you. If you won’t get at least 10-15% profit, why do it? Your lender should leave space for your profit and other costs that come up.

Have questions or a deal where you need help with the numbers? Contact us at Info@HardMoneyMike.com, and we’d love to see how we can help.

You can also get more resources about real estate investing on our YouTube channel.

Happy Investing.

70% ARV: The Hard Money Trick That Could Cost You

When a hard money lender tells you they’ll give you 70% ARV, what does that really mean?

Hard money lenders often say they lend up to 70% or 75% of the after-repair value (ARV) of a property.

Did you know that’s often misleading?

When private lenders (big hard money lenders backed by Wall Street funds) say they lend up to 70% of the ARV, there’s a slight trick that some borrowers miss.

Let’s go over the differences that “70% ARV” might mean for different lenders, so you can maximize your LTV.

The Full Cost of Your Flip

One thing to remember when you’re looking at fixed and flip loans: there are a lot of other costs besides the down payment. You’ll also have closing costs, points, interest, insurance, and other expenses not included in the amount most lenders give you.

We want to make sure we minimize how much comes out of your pocket so you can do more deals or at least get to that first deal.

The 70% Myth

Typically, most lenders in this market will lend you up to 70% of the after-repair value. This ARV is what you’ll be able to sell a property for (not buy it for). It’s how much it should be worth after it’s fixed up.

But here’s the caveat big hedge fund hard money lenders have:

That total 70% of the ARV is split between the purchase price and rehab. And typically, they’ll do 100% of rehab costs but limit the purchase price to 85%.

And this is for their best clients. You’ll see these LTVs cut, depending on your quality, the size of your market, and the location of your property. Smaller markets can go down to 80/90 for purchase price/rehab. Rural properties could go down to 65% overall – if they’ll even lend to you at all.

So the 70% is only for the best properties in the best areas. Let’s dive in and find out exactly how they don’t get to that 70% that they promise you.

Example of the 70% ARV Myth

Let’s look at a property that has an ARV of $200,000. This is what you think you’re going to sell it for, based on the comps.

If our hard money lender is going to give us 70% of it, that’s $140,000 max.

This works for most deals. As long as you follow these budgeting guidelines:

  • Real estate agent: 5%
  • Lender fees: 8%
  • Closing costs: 2%
  • Profit: 15%

Now, let’s say you’re purchasing a property for $120,000 and you’re going to put $20,000 into rehab. This gets you right to the $140k your lender will give you.

But now we got to remember one thing:

Best case, they’re only going to lend you 85% of the purchase price. In this case, that’s only $102,000. (They’ll still cover 100% of the rehab in escrow). 

This leaves $18,000 you’ll be paying for out-of-pocket. Plus, many of these lenders require 6 months’ worth of reserves (we’ve even given short-term loans to investors just so they had enough reserves to get a loan from one of these other larger hard money lenders).

Hard Money Lenders With a True 70% ARV

A smaller, local hard money lender like Hard Money Mike has a different approach to LTVs. Let’s walk through this example with the same $200,000 ARV property.

When we lend 70% of the ARV, that’s a true $140,000 for the right client and deal. This means the purchase is fully funded – plus you get the $20,000 in escrow for rehab costs.

Finding the Right Hard Money Loans

The offer from the bigger lenders will be right for some people. But if you want to maximize your leverage, small hard money lenders like Hard Money Mike give you an alternative.

Want to see if we have the right loans for your project? Reach out to us at Info@HardMoneyMike.com.

Happy Investing.

Text: "ARV & Comps: How to profit on your real estate investments"

What Does ARV Mean in Real Estate Investing?

To profit in real estate investing, you’ll need to know: What does ARV mean?

Real Estate Investing: What Does ARV Mean?

ARV is the after repair value. It’s what the property will appraise for, or sell for, on the current market once the scope of work is completed.

You estimate a property’s ARV by looking at the prices of similar homes in the current market.

What Are Comps?

Comps (comparables) are those similar homes you look at. It’s important that your comps have the same value as your property.

For example, if your deal is for a 950 square-foot home, you’ll compare it to other 900 to 1,000 square-foot homes on the market, not a 2,000 square-foot one. Similarly, compare a 2-bedroom, 1-bath house to houses of the same specifications – not to 4-bedroom, 2-bath homes.

How To Get an Accurate ARV

For your ARV to be accurate, you need to stay true to your scope of work. If you only repaint and re-carpet a house that needed much more work, you won’t get top-of-the-market value when you try to sell or refinance.

On the other hand, if your scope of work is a full remodel, your comparables should be homes that are fully remodeled, so you don’t miss out on any profit.

The money you put into fixing up a house isn’t a direct indicator of how much the house will be worth. What the property looks like when it’s finished has nothing to do with how much it cost to get it there.

What Does ARV Mean for Profit in Real Estate Investing?

Estimated profit is what you expect to make on the transaction between:

  • buying the property
  • fixing it up
  • selling it again.

Additionally, equity is the difference between the amount you owe and what the property is worth. You build equity on your rentals by:

  • buying properties with a low purchase price and a high ARV
  • successfully refinancing after a flip
  • paying down the mortgage with rent income.

If you want to find the true profitability of a deal, then use your ARV and comparables:

ARV – (Purchase Price + Budget) = Profit Amount

Read the full article here.

Watch the video here:

https://youtu.be/4RErCDhSi44

Text: "Hard Money Numbers Know the Basics"

Hard Money Loans – Know the Basics

As a beginner investor, you need to know the basics about hard money loans.

The two most basic hard money answers you need are:

  1. What’s the difference between loan-to-value and ARV?
  2. How do you calculate them?

Know the Basics: Loan-to-Value

Firstly, what’s Loan-to-Value? Loan-to-value, or LTV, involves the:

  • appraised value of a property
  • as it sits right now
  • with nothing changed about it.

As a real estate investor, if a property costs $100,000 as it sits, you know you’re going to put work into it and make it worth more. But that as-is value, the $100,000, is what lenders base their loan amount on.

Know the Basics: After Repair Value

Secondly is After Repair Value. After repair value (ARV) is used more by hard money lenders and the real estate investment world. Banks and traditional lenders more often use LTV.

Because in real estate investing, we’re basing our numbers on what you can do to the property. What can the value be once you fix it up? That’s the number that determines profit, so that number is more important for hard money lenders.

ARV is the target value of what the house will be worth after all your renovations. This ARV should always be higher than the current price of the house when you buy it.

Calculating ARV and LTV for Hard Money Loans

Let’s say you found an undermarket property that’s selling for $100,000. If a lender says, “We’ll loan you 75%,” that could mean two things, and you’ll want to know the difference.

First, if they’re a bank, they’re likely talking about 75% of the value. In this example, that would be:

$100,000  ×  75%  =  $75,000 loan

Hard money lenders will care more about the value of the home after repairs, so they go off ARV. If they loan you 75%, that would be:

$150,000  ×  75%  =  $112,500 loan

If a loan is based on ARV, lenders might want to know – what are you doing to the property? Different renovations will affect the value of the property in different ways. What you will do and the quality of your work will affect the ARV.

When you know the basics about LTV and ARV, your hard money loans will be much smoother.

Read the full article here.

Watch the video here:

How to Invest in Value-Add Properties: Do It Right From the Start

How to Invest in Value-Add Properties: Do It Right From the Start

How to Invest in Value-Add Properties: Do It Right From the Start

Do you know how to invest in value-add properties so it’s done the right way from the start?

Like, how do you know it’ll be a good investment that generates positive cash flow?

Well, today, we’re going to break down some basic terms and offer some key tips to help you decide if a real estate property will generate cash flow…or break the bank.

How to buy value-add properties

One of the most important terms you need to understand before you begin investing in value-add properties is Loan to Value (LTV).

The LTV is the amount of the loan divided by the purchase price (or appraised value) of the property.

Let’s take a look at an example.

You’re looking at a house with a purchase price of $200,000.00, and you need a loan for $120,000. So that means the LTV equals 60%.

How to calculate LTV for value-add properties

When you’re trying to figure out the amount of your loan, remember to factor in your rehab costs. You’ll need money to fix the property so you can flip or rent it.

Your rehab costs could make or break your deal’s cash flow, so it’s important you take the time to collect accurate numbers and calculate them correctly. The best way to determined your rehab costs is to get a written estimate from a trustworthy contractor or inspector.

Believe us, it pays to get a professional opinion.

The ARV

It’s important to get an accurate renovation budget for your value-add properties because lenders will look at it and compare it to the after repair value (ARV).

Lenders need to make sure the cost of fixing the property doesn’t outweigh the value after it’s repaired.

Let’s take a look at another example.

So, you find a property for $100,000. Your contractor tells you it’ll cost $20,000 to renovate. Now you’re looking at $120,000 for purchase and rehab.

The lender you want to use requires at least 10% down.

Next, you need to look at comparable properties in the neighborhood. These comps must have the same number of bedrooms and bathrooms, and be sized within 50 square feet of your property.

With the help of a realtor, you find out the comps come in around $200,000.

So, now you know your property will be worth $200,000 once you renovate it.

This is your ARV.

Is it worth the risk?

So, how do you know if a property is worth the risk? Well, let’s do the math.

Money Out of Pocket with Value-Add Properties

So then we can take that number and calculate your risk:

Risk Level with Value-Add Properties

The basic rule of thumb is to stay under 65%, because it gives you wiggle room for unexpected expenses. If this percentage is higher than 65%, then you should consult with your lender. They might be okay taking a higher risk due to other factors.

But, in general, it’s all about how much risk is involved. The higher the risk, the more money you’ll need to front for your value-add properties.

Do your due diligence

It’s important to do your homework. So, make sure to check values over the last few years in the area you’re looking to purchase. Consider the neighborhood, city, and state.

Here are a few questions to ask:

  • Are the properties holding their value?
  • Have prices reflected a steady increase or decline?
  • Did you check for pros and cons? Like busy streets, crime rates, schools, and nearby shopping? Remember, you’re looking for a short-term or long-term investment here. Whether you’re planning to fix and flip or rent, you want the highest dollar value for your deal.

And don’t forget to ask a title company to check for liens, easements, or exceptions against the property.

Inspection time!

You should also ask a trusted contractor or inspector to check the property for the following:

  • Mold and or drug residue
  • Asbestos, especially in homes built in the 1930’s-1950’s. This harmful building material was officially banned in 1977, but it’s still worth confirming it wasn’t used in your property.
  • Lead paint. Beware of homes built before 1978.
  • Leaky faucets/poor plumbing. Make sure it’s up to code!
  • Electrical issues. Check for broken outlets, and, again, make sure it’s up to code.
  • Roof age/leaks
  • HVAC issues
  • Broken appliances. These include the garbage disposal, garage door, doorbell, sprinklers, and kitchen appliances.
  • Sticky/creaky doors or windows. Take a moment to open and close them to make sure they work.
  • Signs of pests. Search for dead bugs, droppings, sagging floors, and small holes in wall or baseboards.
  • Foundation! Look for cracks above doors and large gaps or cracks where walls meet. One trick is to take a ball and set it on the floors and in hallways. The ball should stay in same place. If it doesn’t, have the foundation checked. And, when in doubt, always have a professional take a peek.
  • Fencing/landscaping
  • Warranties and repair information that can transfer from seller to buyer.

How to find a good contractor

You’ll want to work with someone with a great reputation and quality work. So, it’s important to do your research before choosing your contractor.

Here are some tips for finding the right contractor for you:

  • Ask friends and other investors for referrals. Be sure to ask them if they were happy with their work, reliability, communication, experience, and quality.
  • Interview several contractors until you find the right one for you. Some good questions to ask during this interview include:
    • How many employees do you have and how long have you been in    business?
    • Do you have a referral list with current and past customers (and their phone numbers)?
    • Are you insured? Ask for copy of their policy binder page showing their name and coverage. They should have General Liability and Worker’s Comp.
    • Who will be doing the work? Will there be any sub-contracting or will you and/or your team being doing the work?
    • Has your company ever been sued or had a lawsuit against it?
    • Have you ever sued a client or filed lien against a property?
    • Have you ever declared bankruptcy or had a company under a different name?
    • If the project falls behind schedule, what happens?
    • Has your company ever had a serious accident/hospitalization on the job?
    • Who will be at my house and when? Ask if background checks have been completed, and if there’s a set schedule.
    • May I have a written contract? You’ll want your attorney to review it before signing. Make sure the contract spells out timeframes, as well as how and when the contractor gets paid.

Red flags and precautions

Before you get started, take some of these important precautions to heart.

  • Do not EVER give your contractor large sums of money upfront, especially if you’ve never worked with them before.
  • If your contractor asks or demands 25%-50% upfront, then find someone else. Because a good contractor will have reserves to get the job started on 20% or less down. And they’ll have pre-set dates for payments and money for materials.
  • GET EVERYTHING IN WRITING! Because it’s your only resource if you need it later.
  • Never assume anything.

A professional contractor should have enough reserves to cover minor expenses to get the job started, except for materials. As for those, you should order everything and have it delivered to your property.

If the contractor has a problem with this, take it as a red flag. Find another contractor or tell your current one to purchase the materials themselves (pre-approved by you, of course). You can always compensate them when the job’s done.

These are just samples of questions to start with.

We suggest making a list of all the questions you wish to ask ahead of time. That way you won’t forget anything during the conversation.

At the end of the day, it’s all about having a contractor that will respect you and your property. They should:

  • Be trustworthy and treat you fairly
  • Complete the job on time
  • Meet your budget
  • Provide quality work

This might seem like a lot of work to do before the real work begins, but trust us, it’s worth it! If you take the time to find the right property, the right lender, and the right contractor, then your flip or rental project will be a lot easier.

Need help evaluating your next value-add property? Our team is always here to help!

Happy investing.