Purchasing homes to renovate and flip is a common real estate investment strategy. So, too, is home buyers purchasing an inexpensive property that needs some rehab or customization, or even a mortgage refinance when your existing property needs renovations. However, just because you have the desire to purchase a home and then renovate it does not mean you might have the cash resources to do so. This is, of course, where mortgages come into play, as many investors and buyers will finance a property purchase.
Banks will only offer a certain amount of lending to borrowers based on a specific formula known as loan to value (LTV). If the LTV of a property isn’t within acceptable parameters, a bank is unlikely to offer mortgages to prospective borrowers, as anything over 80 percent is considered a poor risk. However, there’s another ratio that comes into play when talking about purchasers seeking mortgages for homes they want to renovate. This ratio, which is called “after repair value”, is related but has some important differences. Here’s what you should know.
What is “Loan to Value After Repair Value”?
As mentioned above, the LTV is a ratio that lenders use to determine the balance between the amount of money being lent to the overall value of a property. Meanwhile, an after-repair value, or ARV, is the estimated value the same property after renovations have been completed. This differs from LTV as ARV is not calculated using the current condition of the property.
ARV is commonly used by real estate investors who plan on flipping a home as a way to gauge the worth of the property they plan on rehabbing. There are a couple of factors that go into calculating that worth, which include the purchase price of the property, the cost of repairs, and then the price it can be resold for after those repairs, whatever they may be, have been finished.
How to Calculate “Loan to Value After Repair Value”
Calculating an ARV is slightly more complicated than calculating an LTV. For example, the loan to value ratio for a property is the value of the mortgage being sought divided by the total cost of the house, as expressed by a percentage. An example would be how buying a home that’s valued at $100,000 with a $20,000 down payment would require an $80,000 mortgage with an LTV of 80 percent.