The Importance of ARV
When starting the process of fixing and flipping houses, many questions quickly arise. This issue is one faced by everyone venturing into the new marketplace. How much money will be loaned to me? What will the interest rate be? Will my rehab be covered? What will the value of the house once all the work has been done? These are common questions that even experienced flippers encounter on a regular basis.
The ARV, or after-repair value of the house, is one key determinant in determining whether a fix-and-flip opportunity and is worthwhile undergoing. The ARV is used by both the flipper and his or her lenders to figure out if they wish to be involved in the project. The discussion below examines ARV and what it practically means as part of a real-estate investment.
The most important part of being able to use ARV in your next flipping venture is understanding what it actually is. The after-repair value is the pre-rehab estimate of the value of the home once that rehab has been completed. The ARV is a fairly good indicator for the amount that the house can be sold after the flip is done. ARV is figured out by combining the amount of rehab put into the home as well as the sales of comparable houses in the same area. The individual appraisal of the house is very important in determining ARV as well, so make sure to get a good appraiser.
Now that you’re familiar with the idea of ARV, let’s take a look at what it means when it is applied practically. When flippers look for their projects to be financed, they seek out lenders who tend to lend upon three factors: the percentage of loan to as-is value, loan to cost, and loan to after-repair value. The loan to after-repair value is particularly important because it takes the amount of rehab into consideration. Specifically, lenders generally write loans of about 70 or 75% of after-repair value with anything over that being considered too speculative and risky. So, if the ARV of a property is $100,000, and your lender is willing to give 75% loan to after-repaired value, you will be written a loan for $75,000.
Entering the fix-and-flip market can be a very exhilarating way to make money, but it comes with its risks, so one way to vet flipping opportunities is considering the ARV of the house before you get involved.
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