As the market has come back, we have seen the rise in requests the last 18 months for ARV loans, as well as more and more requests for higher LTV ARV loans. While we completely understand that investors want to use as little of their own funds in a deal, so they can do more deals, this is leaving a lot of lenders exposed if there is a downturn.
Many ARV lenders in today’s market were nonexistent 7+ years ago before the last market downturn. Those of us that are still here, we remember all the 100% ARV lenders. Notice how that is past tense? These lenders come and go with market ups and downs.
ARV loans are the riskiest loans for a lender, as they are lending on the future value of a property, assuming a perfect world. As we know, this is far from a perfect world. We have taken steps to protect ourselves as well as our investors in case of another downturn.
By lowering our LTV’s on ARV loans from 65% ARV to 55% in many places, this now leaves the borrower 10% to use in case they need to do a hard money refinance when the rehab is done. One of the biggest problems we encounter is too many borrowers don’t take into account closing costs. If you have a loan at 65% ARV, and you go to refinance at 65% of the value when completed, but you have no cash, how do you close? The 10% we are taking off the initial ARV loan will be enough for our clients to cover closing and title fees (and leaves a little room in case the new appraisal comes in a little short), so our borrowers can keep their rehab if they choose, rather than flip it.
NLDS Corp is lending on rehabs based on the ARV in 45 states.