ARV, LTV and LTC: What Does it All Mean?

Lenders often use these acronyms to define their loan products. Understanding these terms will help you to choose the right lender for your project.

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.

ARV: What It Means and Why It’s Important

In real estate ARV is short for after repair value, or the estimate of a property’s value after all repairs and upgrades are completed. For real estate investors, especially those who flip houses, this number is important because it calculates the margin between the “as-is” value of the desired investment property and the value of a developed property that has been completely renovated.

ARV = Property’s Current Value + Value of Renovations

It is the basis of the property’s selling price, comprising the purchase price plus the total cost of repairs. The key to the profitability of property flipping is that repairs more than pay for themselves.

The after repair value will help you plan your strategy and also help determine which real estate financing choice is best. The ARV can provide investors a pretty good picture of what they can sell an investment property for.

In order for the ARV to be accurate, the investor will need to be able to get accurate repair estimates and insight into the local market. Seasoned investors that have been flipping homes for years can usually walk into a property and assign a value based on their knowledge and experience quickly. For newer investors, this will not be the case and it will take a good bit of time.

The ARV is a calculation of a snapshot in time – the value of the property under the current housing market conditions and the home’s state of repair at the time of calculation. This value can change daily throughout the renovation cycle of a home.

What Is the 70% Rule?

Maximum Purchase Target = (ARV x 70%) – Estimated Repairs

This rule is popular for real estate investors. It tells you the maximum you should spend on a flip property. However, it is only a general guidance and you should not consider it an ironclad rule.

After Repair Value (ARV) Limitations

The housing market can change, causing comparable home values to go up or down. Renovation costs can also vary and there may be hidden damage in the property.

In addition, an appraiser might value properties differently than a realtor or investor. Lenders use appraisals, which could lead to a lower pre-repair property value. Flippers must be good negotiators when they buy a distressed property and then sell it after repairs. A flipper good at estimating repairs but poor at negotiations may not receive the property’s ARV at sale time. 

Need Help Assessing Your Potential Property?

Investor Loan Source is not your everyday lender – we were created by real estate experts who know the markets and typical renovation costs well. If you need help assessing a property and determining if it is “a good deal,” or not, please reach out to us. We are committed to helping investors grow their wealth through real estate. Need a loan? We have a wide variety of products for your fix and flip and rental properties, as well as commercial and wrapable loans.