ARV: After Repair Value
This term is used by appraisers to tell the value of a structure once all items on the scope of work (SOW) have been completed. Most lenders will loan a percentage of this valuation to a borrower and then hold the repair funds in escrow.
LTV: Loan to Value
This term is used to define the amount a lender will loan on a particular property in reference to the valuation. For instance, if you are looking to buy an investment property that has an appraisal of 100,000 and your lender loans 70% LTV, then you can expect a loan on this property for 70K. If your contract for purchase is for 80,000, then you must bring at least 10,000 to closing. If it is under, you may be able to cash out.
LTC: Loan to Cost
Some lenders use this to tell us the percentage of funding one can expect on a purchase. Sometimes this is regulated by the state. For instance, if a lender tells you that they loan 90% LTC, you can expect to receive a loan of 90,000 when your purchase price is 100,000. This means you will have to bring the difference to closing.
How They Work Together
Let’s imagine that Sam has a rehab property under contract for 60,000. He needs to invest 20,000 into this property for repairs, bringing his total loan amount to 80,000. His ARV appraisal states that after his work is done on the property it will be worth 100,000. However, Sam’s lender only loans 70% ARV and 90% LTC. Since the property is under contract for 60,000 the lender will only loan 90% of that amount which is 54,000. In this scenario the lender agrees to loan 100% of the repairs (which will be held in escrow) up to the after repair value of 70% which is 70,000. Since the contract is for 60,000 and the loan amount on the contract will be 54,000 there is 16,000 left to use towards repairs, meeting the 70% ARV or 70,000. Remember that Sam needs 80,000 total and that is what the appraisal was based on. Therefore, Sam must bring the difference to closing which is 10,000.
Let’s look at another example. Imagine that Mary has a rental property she is looking to refinance. The appraisal comes in “AS IS” at 80,000. Mary still owes 30,000 on her lien leaving her with 50,000 in equity. Her lender agrees to loan 70% of the LTV an 100% of the LTC. In this case she would get a loan for 56,000. Of that 30,000 would pay off her prior lien leaving her with 26,000 to cash out on. In this scenario Mary is only paying her closing costs. Please note that in some cases lenders will allow you to roll in closing cost fees.
Find a Lender You Can Trust
Finding a lender you can trust is essential in this business. Understanding their loan thresholds can help you to evaluate deals before you invest a significant amount of time into a project that may ultimately not work for your circumstance. Be sure to choose your lender that will explain the loan terms and any items that you don’t fully understand.