The Key to the Business
After Repair Value for Residential Assets and its Impact on Hard Money Lending
by Charlie Einsmann
T he first—and last!—tenet of hard money lending is to correctly value the asset that you are lending against. When evaluating a project for lending purposes, the first thing we focus on is After Repair Value (ARV). ARV is the value of an asset after the buyer has fixed it up and is ready to market it. When your loan is in the first position you need to focus on what the property is worth after a renovation is complete. Hard money lenders lend on a factor (or percentage) of the ARV. For example, if the ARV is $100,000 and the factor is .7, the lender will loan $70,000. It is a simple formula, but ascertaining the ARV can be challenging. As a hard money lender, we never want to take a property back at either a foreclo- sure or trustee sale. If we have correctly determined the ARV, then this will make our loan a safe investment for both us and the house flipper. Hard money lenders are going to make money either way, but it is
data is old and their value algorithm takes into consideration properties that have closed too many months ago. When calculating the ARV of a proper- ty you must compare apples to apples. I have seen too many investors make mistakes like comparing a three-level house to a one-level house or simply comparing a house built in 2000 with a house built in the early 1970s. Below are the criteria for computing the ARV: 1 Proximity of the property Compare properties within the same subdivision. If the area is more rural you might need to increase the area from which you select comps, but do not go too far out. If you are in a city I would stay to a 10 block by 10 block square. Cities are tricky in that a lot of values are determined street by street, so you really have to be careful about locating comps.
more important for the house flipper to make a profit. This creates a win-win and makes the house flipper a frequent custom- er. Part of our loan process is computing the ARV with the buyer. Sometimes our prices do not agree, and then we compare comps. On many occasions we have ad- vised investors to not buy an asset because the deal is too tight. Often the investor follows our advice and is pleased with the outcome when recognizing that the proper- ty is not worth as much as once thought. How do you calculate the ARV? The best way to do this is to simply get on your MLS and evaluate recent sold comps along with the active and under-contract inventory. If you do not have access to the MLS you should hire a local Realtor and simply have him or her either send you some comps, or do a Broker Price Opinion. Never rely on Zillow or Trulia, because some of their
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