What is ARV? Why Is It Important?

[Norberto Villanueva]

The answer to the question, "What is ARV?" is complex.

On the surface, it's an acronym for after-repaired or market value. In other words, a projection of what it will be worth on the open market once repaired. However, in the context of an acquisition cost or contract price as it pertains to lending risk, what is ARV?

Before exploring it, it's important to note ARV is a construct used more with asset-based lenders than with more traditional, credit-based lenders, where LTV or loan-to-value is one that is more prevalent.

Determined by dividing the sum of purchase price + closing (acquisition) costs by market value, a $100k ARV property purchased for $40k with rehab costs of $20k was acquired at about 60% of ARV...

...($40 + $20k = $60k) / $100k ARV = an acquisition at 60% of ARV)

Recently, a beginner investor posted a need for 100% financing on a "75% ARV" investment opportunity, usually a viable candidate for private or hard money lending, with anything below 70% being better. However, upon further discovery, the purchase price and rehab costs were closer to 85% of ARV, far outside of most private/hard money guidelines, especially for a beginner.

In fact, anything above 80% ARV is almost certainly more in the realm of credit-based lending where, albeit with better rates and terms, that same $100,000 project requires at least a 20% down payment, usually with no rehab funding.

In closing, before reaching out to potential lending sources it's important to understand and respect their tolerance for risk by painstakingly projecting, accounting for and presenting all costs as accurately as possible. Not only is this critical for the success of any project, but it is also a lending requirement.