Fix and Flip After Repair Value (ARV) Financing

Over the years, numerous rehabbers and prospective house flippers have asked FCTD for fix and flip after repair value (ARV) financing to fund their next project.

This has always seemed like an odd question because ARV is simply an underwriting data point, just like AS-IS value, loan-to-value (LTV), and loan-to-cost (LTC). They’re simply values and percentages that private lenders analyze when making a credit decision on a fix and flip loan.

What I’ve discovered through these conversations is that people asking for an "ARV loan” are really asking for 100% financing or a zero-down fix and flip loan based on the lender’s estimate of after repair value. They found a great fixer upper but are low on cash, so they're looking for the elusive 100% fix and flip loan while dressing their request up as an ARV loan.

In the remainder of this article, I’ll explain this common misconception so that rehabbers and house flippers can be better informed and adjust their fix and flip financing expectations.

What is After Repair Value (ARV)?

ARV refers to the estimated value of a property after repairs, renovations, or improvements. It's an essential figure in fix and flip financing, especially when the lender is providing both purchase and rehab financing to the investor.

How Private Lenders Determine After Repair Value (ARV)

Private lenders determine ARV by ordering an appraisal that provides both the AS-IS value and the after repair value.

Here are the steps in the process:

1. The rehabber enters into a contract, for example, to buy a property for $400,000 with private money financing.
2. The private lender orders an AS-IS + ARV appraisal, submitting a copy of the building plans (if square footage will be added) and the rehab budget (which details the scope of work and the quality of the materials).
3. The appraiser inspects the property and determines the AS-IS value is $400,000.
4. Based upon the scope of work and comparable sales, the appraiser determines the ARV to be $600,000.
5. The private lender now uses the $400,000 AS-IS and $600,000 ARV as data points to determine the loan amount.

How is ARV Used in Underwriting Fix and Flip Loans?

In addition to using AS-IS value and ARV, private lenders analyze the following factors when setting loan terms, including loan amount, interest rate, and origination fees:

• Borrower Track Record 
  • Background check
  • Credit check
• Borrower Liquidity
  This includes liquidity at closing and post close. I cover this in greater detail here: How Much Money Do You Need to Flip a House?
• Property Location
  Urban and suburban locations are preferred due to the number of comps and potential buyers. Ex-urban and rural properties have fewer comps and fewer potential buyers.
• Market Conditions
  This encompasses the current interest rate environment, local market variables, and more. 

After reviewing all the data, the credit decision may come back with the following figures:

• $400,000 AS-IS Value
• $600,000 After Repair Value (ARV)
• $320,000 Purchase Financing — 80% LTV
• $100,000 Rehab Financing —100% LTC
• $420,000 Total Loan Amount
• 70% After Repair Value (ARV)

With these numbers, the lender is providing what we call an “80/100” fix and flip loan (80% LTV on the purchase and 100% LTC on the rehab financing).

The $420,000 total loan amount divided by the $600,000 ARV gives us a 70% ARV loan.

This is important:

Fix and flip brokers and lenders may have a page on their website that indicates 75% ARV loans — or even 80% ARV loans. This is somewhat misleading.

It should read, “75% ARV loans or 80/100 purchase/rehab loan, the lower of the two.” The private lender will almost always revert to the lower figure.

How Borrowers Should Look at ARV Fix and Flip Lending?

As I mentioned in the beginning, most of the house flippers and rehabbers who ask about our “ARV loan program” are really hinting at 100% fix and flip financing if the ARV comes out to 70% or 75%.

That’s wishful thinking.

ARV needs to be kept in context. It's simply one component of the financing equation that private lenders use when underwriting fix and flip loans. It’s not a magical percentage that will lead to a zero down payment loan, where the lender shoulders all the downside financial risk, and the borrower enjoys the upside gains.

I would think of ARV as your (and the lender’s) future protective equity when you sell the house.

In the example above, where the final loan amount came in at $420,000 against a $600,000 ARV, you’ll have an expected $180,000 of net profits (minus real estate agent fees and closing costs).

Summary

After repair value is simply a data point private lenders use when underwriting fix and flip loans for rehabbers and investors. ARV gives lenders an idea of the future protective equity their loan will have after the project is finished and listed for sale.

Many undercapitalized house flippers look to "ARV loans” as a magical solution to acquiring and renovating a fixer upper without contributing any of their own cash to the project.

Instead of looking for an ARV loan, house flippers and rehabbers should look at ARV as the future profit margin when they sell the house — not as an easy way to get into a fixer upper property.