One of the great things about getting a hard money loan is that it is often both faster to get approval, and higher in the amounts that are offered for loans. If you’re not familiar with the world of financing, mortgages and loans, you often see very confusing acronyms that don’t do much to explain themselves. One of the things that you will often see with talk of hard money lending is LTV and ARV for loans. LTV is usually brought up when talking about banks, while ARV is something that relates to businesses like us, that actually do hard money loans.
So what is an ARV, and how does it differ from the LTV?
Banks & The Bottom Line
When you get a loan on a property from a bank, or, more commonly, a mortgage for people that are buying home in which they wish to live, you will get an “LTV” type loan/mortgage. LTV simply means “loan to value.” This means that the amount of money that the bank would consider loaning is based strictly on what figure they get from an appraisal of the property.
In other words, if you’re interested in a fixer-upper home that needs a lot of work, an LTV loan will be based entirely on what the current worth of the residence is. Even if it’s a home that, when renovated, could be worth $100000 in the area, if it’s currently broken down and only worth $20000, that’s the amount you’ll get on the loan.
The Hard Money ARV
ARV, on the other hand, stands for “After Repair Value.” This means that when you see that same building at a price of 000, but realize with the right repairs, it can sell for 0000, you can take those figures to a hard money lender. They can then, upon approval, give you a loan based on the value of what the building eventually will be when the work is done.
This means that you can get more money to do your repair work quickly, make your sale, get your profit, and clear your loan. But only if you’ve balanced your numbers correctly. In this way, hard money loans are faster, easier and more profitable for someone with a good head for numbers and real estate.
The flipper or investor are always looking to maximize their ARV (after repair value) while keeping their rehab costs down, this allows them to turn the property with a profit and move onto their next project. One pitfall is overestimating your ARV at the beginning of the project, then over improving the property. This is seen in many cases where the investor does not do an ARV or “subject to” appraisal prior to purchasing the property.
Hard money lenders that lend on the ARV or After Repair Value usually appraise the property subject to the repairs you plan to do, this way they can determine the finished value. This is an important step in the process that should not be skipped.