In the fix-and-flip business, you’ll hear a lot about LTV and ARV. LTV stands for loan-to-value. It’s the amount you’re requesting from your Texas Private Money Lenders in relation to the current value of the property. For example, if you’re purchasing a property worth $200,000 and requesting $100,000, your LTV is 50%, though it’s sometimes represented as 50 LTV.
ARV, or after-repair value, is more concerned with what the property will be worth after you’ve finished repairs and the home goes on the market. You’ll calculate this by adding the purchase price to the value of renovations. For example, if you pay $100,000 for a home and the repairs and upgrades you make will increase value by $50,000, your after-repair value is $150,000. This gets taken a step further in lending, particularly as it pertains to the total amount of your loan. Most will not provide loans that are higher than 70% of what the home will be worth. This is represented as 70 ARV or 70% ARV. If you’re new to flipping or the deal is riskier than others, expect to receive much less than 70% ARV.
It’s also worth noting that getting an accurate ARV usually requires bringing an appraiser on board. Those who attempt to go it alone are likely to find the process time-consuming and tedious and will probably produce an inaccurate ARV. Furthermore, many Texas Private Money Lenders don’t use ARV because it’s not a guarantee. Instead, LTV will be used.
How much value does a Jacuzzi tub in the master bedroom add? What about a farmhouse sink in the kitchen, a built-in in the living room, or ceramic tile throughout? The reality is, most people cannot answer these questions off the top of their head and research may be inconclusive or steer you the wrong way. It takes many flips to gain a grasp of value, so you’ll want to work with an appraiser to help determine how much value your upgrades and repairs are adding. Your appraiser will also tell you what the property is truly worth before the repairs, which is the other big component of ARV. You can’t rely on Zillow or similar for this because the services know nothing about the condition of the property.
Even when the Texas Private Money Lenders you work with don’t use ARV to calculate loan terms, the concept is still worth keeping in your toolkit, particularly as it pertains to the 70% rule. In short, this guideline involves subtracting your repair costs from the total expected sales price, and then capping your bid on the property at 70% of what’s left. For example, if your home will sell for $150,000 after putting $50,000 into it, you don’t want to spend more than $70,000 on the purchase of the property. (150,000- 50,000 = 100,000; 100,000 x 70% = 70,000) The formula is often considered the gold standard of flips because it ensures you have money to cover expenses and will make a solid profit, even if you run into minor issues on the flip, but it isn’t the end-all. You’ll want to consider any fees, permitting costs, appraisal costs, and so forth as well, as this paints a better picture of the value of your work and what you’ll really earn when your project concludes.
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.