How Does ARV Determine Risk for Arizona Hard Money Lenders and Borrowers?
How does ARV influence the lending process?
When Arizona Hard Money Lenders consider granting a loan amount they generally consider LTV and ARV. These two indicators help them analyze equity, risk, and return.
First, there is LTV. LTV is a loan-to-value ratio used to determine the amount of money a lender will lend. For example, say a home is worth $100,000 in a given market. A borrower receives an acquisition loan from Arizona Hard Money Lenders for $50,000. In order to acquire the property, the borrower must match the lent amount of $50,000 with $50,000 of his or her own money. This establishes the LTV at 50%. Should, God forbid, the borrower fail to pay the lender and the property is foreclosed upon, then the lender will be buffered from loss upon liquidating the asset.
ARV, or after repair value, calculates the value of a distressed home after renovation. This ARV value helps Arizona Hard Money Lenders determine risk and equity regarding a property not only by understanding the current loan-to-value (LTV), but by looking at the after repair value (ARV). ARV is calculated by adding a property’s current value plus the value of renovations. To do this, one looks at the average price of similar homes in a neighborhood. These homes should have similar acres, rooms, features, and amenities. After this, the cost of renovating the house is evaluated, and finally the prices of renovated properties in the area are taken into account. As an example of this, say that there is a house worth $50,000 in a given neighborhood, and it will only cost $20,000 to repair it, summing up to $70,000 in total costs. However, after the renovations to the house, the property will be worth $100,000. This puts the ARV of the home at $100,000. The hypothetical profit is $30,000.
How Both Arizona Hard Money Lenders and Borrowers Benefit from ARV
Arizona Hard Money Lenders use ARV to set a cap for the amount they are able to lend. Generally, 70% of ARV is the maximum loan amount for Arizona Hard Money Lenders. Lending out more than this amount creates far too much risk for lenders. Nonetheless, the ARV establishes a ballpark idea of what lenders are able to lend by understanding how much is too much.
What is the maximum amount Arizona Hard Money Lenders will loan?
Aside from lenders, LTV and ARV help real estate investors calculate how much they can expect to receive from a hard money lender, how much they will need to put down, and how much risk they will face when trying to secure a profit. After looking at the figures, real estate investors will have a better idea if the investment is worth it to them. Will it give a good return on what they have put in? Will there be enough buffer room for them after the lender gets a cut of interest? Are the efforts of producing the renovations and marketing the property worth it in the end? Risk—Risk is at the heart of lending and borrowing hard money.
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