ARV, or After Repair Value, is a key factor in any hard money loan. This is because a rehab, or build, is only a good investment for the lender based on its value once you’ve made it shine. So how is ARV calculated, and how does it fit into the process of procuring a loan?
We Know You’re a Change Agent
Hard money lenders are well aware that you’re the real estate equivalent of what the tech industry calls “early adopters.” You see potential and value in a house, in a neighborhood, or in a market, before others have realized what a find it is. If you can actualize that value by planning, budgeting, and executing a successful renovation, you’re the kind of person we want to work with!
We Choose Our Metrics Carefully
ARV is integral to how we decide your loan amount. We send an appraiser to look at the property, comparable houses in the area, and other relevant data about your market. This ‘Subject to’ appraisal assesses the value the house is likely to fetch on the market once you’ve done everything on the Scope of Work (SOW). At Aloha, our loans can go up to 70% of loan-to-value, which may mean less money out of your pocket at closing. After you acquire the investment property at a discount, the remaining loan balance is then disbursed in “draws” as stages of work are completed.
The good news about ARV is this: your loan is based on the property’s potential. While we do consider your credit report, we also know that there are inherent risks involved in real estate investing, and that even a solid pro has likely had low moments here and there. So we focus on the value of the property and your track record as an investor, rather than fixating on your credit history. This, along with our fast turnaround times, are two of the best examples why hard money loans can serve as a better alternative to traditional bank loans.
The ARV Is Your Yardstick, Too
So what can you do as the borrower to make sure the completed renovation matches or exceeds your projected ARV? Most importantly, you should budget both your money and time, and know what you’re getting into when you create your Scope of Work.
Reduce your materials costs wherever possible. Once the construction reserve is set, there’s no going over budget—not without digging into your own pocket! Your initial choice of materials should be well-suited to the projected ARV, neighborhood and comps. So skip over-the-top appliance upgrades in 3 BR houses appraised for 115K. You’re likely not going to recoup the best return on that investment. Make sure, too, that you have an accurate assessment of what you’re going to pay in labor costs. Know your contractors’ limitations ahead of time! When you deliver your Scope of Work to us, make sure you leave headroom for unexpected expenses, because sometimes the only predictable thing about home renovations is their unpredictability.
Think of ARVs as a Mutually Beneficial Resource.
ARVs are an assessment that allows you, the outside-the-box thinker, to get your hands on the capital you need to realize your vision, when other investors might not share your enthusiasm. But it’s also a benchmark that helps keep you on track throughout the renovation process. In that sense, it’s as useful a tool for you as it is for us.
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