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?

In short, 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. 

Calculating the ARV of an investment property involves researching recently sold comparable properties (comps) in the same area, analyzing their sale prices, and adjusting for any differences in condition or features. To do this, determine the price per square foot of each comp, average these prices, and then multiply by the square footage of your property. This process provides an estimated value of your property after repairs. However, you should also factor in the estimated repair costs into your real estate investment decision.

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 renovation costs, it’s a good rule of thumb to always estimate high. Include all of the costs of repairs in the initial numbers, even if you plan to do some yourself. This way 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 real estate market conditions 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 for the value of the property 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 hard money lends will use those LTV rates on the ARV rather than the as-is value or the purchase price, when the borrower is buying an investment 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 h private lender offers you a 65% LTV, then you can get a total loan amount of $84,500. In this example, even though the hard money loan LTV is lower, a high ARV can raise your potential loan amount above what the bank can offer, allowing you to get the maximum loan amount.

Montegra Can Help You 

Understanding the After-Repair Value (ARV) is essential for any real estate investor aiming to maximize their return on investment, and securing the right financing is equally crucial. At Montegra Capital Resources, we specialize in providing private hard money loans that cater to your specific investment needs, ensuring you have the necessary funds to purchase and rehabilitate investment properties with confidence. Our experienced team is dedicated to helping you navigate the complexities of real estate investment, offering fast, flexible financing solutions tailored to your unique situation. Contact us today to learn more.