Every week or so, we receive a phone call or email inquiry from a prospective house flipper inquiring about our After Repaired Value (ARV) hard money fix and flip financing programs. And I have to admit that as soon as I hear someone talking about an ARV loan, my ears perk up because I know that it’s going to be hard to get the person off their insistence on an ARV-based loan.
Why are they so insistent on obtaining a 75% or 80% ARV loan in the first place?
Nine times out of ten the prospective borrower found a property that they could acquire for well below market value which they believe could easily be flipped within 90-120 days for a big profit but at the moment the borrower is undercapitalized. When I say undercapitalized, I’m talking about having only $15,000 in their bank account. More often than not, they have $0 in the bank but they did a great job finding a great property to flip.
In their mind, it’s the quick $40,000 profit opportunity of a lifetime if only they could find someone to lend them all the money to strike before the deal is gone forever.
In the mind of a hard money lender who sees this loan request, they think, “This person wants me to put up 100% of the investment risk and receive 0% of the reward besides 2-3 monthly payments at 1% of the loan balance per month. No thank you. I’ll pass.” As you can see, there is a disconnect between an ARV-thinking borrower and a hard money lender.
To reap the rewards of flipping houses, real estate investors need to have a decent amount of their own money at risk in each property. As a general rule of thumb, it takes about $100,000 in the bank to flip a $250,000 house.
All the higher leverage fix and flip lenders that extend 75-90% Loan-To-Value (LTV) on the purchase money financing factor in as-is value, purchase price, and After Repaired Value into their underwriting formula. They generally won’t go higher than 60-65% ARV.
For example, an experienced real estate investor did a great job sourcing an underpriced property, often a foreclosure or short sale. The house needs a lot of maintenance and cosmetic improvements that cost approximately $60,000 to make it move-in ready for a first-time buyer or end user to purchase using conventional financing.
Breakdown of the LTV % for Purchase, AS-IS, and ARV
- $300,000 Purchase Price
- $340,000 AS-IS Value (based upon an appraisal)
- $435,000 After Repaired Value (ARV)
- $264,000 88% of Purchase / 77% of AS-IS / 60% of After Repaired Value
In this 88% LTV scenario (we go by Purchase Price LTV), which we’ve done many times before, the borrower came in with a $36,000 down payment + closing costs + $60,000 in renovation expenses. After carrying costs (mortgage, taxes, insurance, & utilities) of approximately $10,000 over 3 months, they had $100,000 of their own money invested in the project, which falls in line with the $100,000 rule of thumb that I mentioned above.
After Repaired Value is always a factor in the underwriting of a hard money fix and flip loan. However, ARV is only one third of the Loan-To-Value equation along with purchase price and as-is value.
Instead of pursuing a loan solely based on 75-80% of After Repaired Value, a real estate investor’s time would be best spent seeking out a capital partner, like a friend or family member who has been interested in house flipping and has at least $100,000 to put into a project, and offer to split the profits 50/50 or some other percentage.
That way, the real estate investor(s) have their own money invested in the project, which makes it much easier to obtain an approval on hard money fix and flip financing at 70-85% of purchase price, which we can source for a quick closing.