In the world of real estate investing, you’ll often see LTV (Loan-to-Value) versus ARV (After Repair Value) as common means for evaluating the risk of a loan as it relates to a residential property. The Loan-to-Value ratio is the amount being borrowed as compared to the value of the property, while the After Repair Value is estimated based on the value of the property after the renovations are completed.
Let’s look at each of these in a bit more detail:
As mentioned, Loan-to-Value takes the amount borrowed and compares it to the present value of the property, not future improved value. To derive a value for the property, many lenders just do a drive-by assessment, which often inaccurately depicts the value of the asset. At Patch of Land, we review property “comps” to determine the sales price of similar properties in similar condition and located in the same neighborhood as well as have third party inspectors do a walk through appraisal in order to determine the value of a property.
Many lenders have different requirements for the LTV percentage they’ll allow. At Patch of Land, we lend up to 85% of the value of the purchase price or as-is value (the lesser of the two) for well qualified borrowers.
As an example of Loan-to-Value, if an investor borrows $80,000 of the total $100,000 purchase price of his home, the loan-to-value ratio is 80 percent.
After Repair Value
After Repair Value is an estimated value of a property after renovations. Researching the property, including the location, lot, building, comps and the estimated value of repaired properties in the neighborhood over the last six months, determines the ARV. You also need to take into consideration additional expenses that may occur in the way of holding costs or points. Lenders often have different requirements for the amount they will lend based on the ARV. At Patch of Land, we typically lend 70% of the ARV with a minimum down payment of 15-25% depending on the borrower and the location of the asset.
As an example of After Repair Value, let’s say Sarah wants to borrow money for a fix and flip rehab project. We determine the property in question would sell for $400,000 on the market. We will lend up to 70% of that amount, which in this case would be up to $280,000, to purchase the house and do any needed repairs.
PRO TIP: As a borrower applying for a loan to improve a property, you’ll need to have a line item rehab budget and inspections will take place throughout the draw process so that disbursements against the loan can be made.
How should these two ratios factor into an investor’s decision to move forward with a real estate investment?
Which one is better for you really comes down to the numbers. Remember, we typically lend no more than 70% ARV, but can go as high as 85% for LTV. Therefore, it’s normal for an LTV percentage to be greater than an ARV percentage on a loan. You’ll really need to make sure your numbers are on point, that you’re buying right, and that there’s enough room to improve the property so that you can get your money back and make a profit.
Lending with Patch of Land
We can fund your first loan in as little as 7 days — and we can fund on most asset classes from single-family homes to small apartments, mixed use and multi-unit apartments. Connect with us at Patch of Land for more information on how to partner with us on your next project.