One of the greatest differentiators between hard money lenders and institutional lenders is that hard money lenders are willing to consider after-repair value (ARV) while institutional lenders will only consider as-is value when they are determining your loan amount.

What is after-repair value?

ARV is the estimated value of a property once all repairs and improvements have been made and it’s ready to be resold, refinanced, or rented. The ability to estimate repair costs and renovated values for distressed commercial and investment-purpose real estate is a crucial skill for a real estate investor to possess. When approximating repair costs, it’s a good rule of thumb to always estimate high. Include the costs of all repairs in the initial numbers, even if you plan to do some yourself, so that you’re covered in the event that additional repairs are needed or cost more than you planned. It’s important to research and learn about the local market and local repair costs in order to calculate accurate ARVs for your properties to present to your hard money lender. Also, keep in mind that your lender is likely to request their own appraisal as part of their due diligence to compare with the ARV that you present, so it’s important to make yours as accurate as possible.

How does ARV affect your hard money loan?

Although hard money lenders typically offer significantly lower loan-to-value (LTV) rates, ranging from 60 to 75%, this is countered by the fact that they will use those LTV rates on the ARV rather than the as-is value or the purchase price, when the borrower is buying a distressed property and presents plans to rehabilitate the property and increase its value, if they plan to resell, or its income stream, if it’s a rental property. This is beneficial for borrowers because institutional lenders will usually base the loan amount they offer on the lower of the as-is value and the purchase price, and are generally unwilling to consider the ARV value. For example, if you have a property that is currently valued at $100,000, and is selling for $90,000, then a bank offering a 90% LTV will loan you $81,000. However, if the ARV appraisal comes out to $130,000 and your hard money lender offers you a 65% LTV, then you can get a total loan amount of $84,500. So you see that even though the hard money loan LTV is lower, a high ARV can raise your potential loan amount above what the bank can offer.