Getting started in the real estate investment world can be a lot of information to absorb. We made it simple with a list of frequently asked questions in the ALPHAbet: The ABC’s of Hard Money.
A is for ARV or After Repair Value.
When you are investing in a fix and flip project, it is important to understand what the house will be worth when the project is complete. The after repair value (ARV) is essentially what the house would be worth on the market today if all renovations and repairs were completed right now.
Understanding this number is important for both you and your lender, whether it be a hard money lender or a private lender such as a family member or friend. The after repair value for your fix and flip project is determined by looking at the comparable properties currently on the market.
Determining Profit Margin
The ARV also helps you to understand your profit margin. If you were to take all of your costs of your fix and flip (purchase price, rehab costs, & holding costs) and divide it by the ARV then subtract that number by 1, it will give you what is referred to as your profit margin.
All costs / ARV – 1 = Profit margin
Ideally, you want 20%. This leaves room in the project for construction overruns, lower sale prices, extended holding costs, and other unforeseen circumstances.
It’s incredibly important to us at Alpha that our investors are profitable. Whether you’re completing a fix and flip project, a buy and hold, or new construction, it is paramount to us that you make money on the deal. Hiccups in any project are inevitable and often times, especially for newer investors, the unexpected goes underestimated. Things take longer than expected, unforeseen costs arise, and so on and if you don’t start with a decent profit margin, you could potentially end up losing money in the deal. Understanding that margin helps you to see potential profit while also showing you how much potential risk there is.
What to Expect from Alpha
When you submit an application with Alpha Funding Solutions, we will order an ARV appraisal. The appraiser along with our in-house construction team will review your budget to confirm that the proposed scope of work can be completed within the proposed budget.
When working with a hard money lender such as Alpha, the ARV helps us to determine how much money you will need to bring into the deal. We typically lend 90% of the purchase price and 100% of the construction costs up to 65% of the ARV.
As you can see, the after repair value plays a very important role in underwriting any real estate investment deal. If you’re calculating your own numbers, be sure to be realistic about what the end product will look like. Use relevant comps and when in doubt, ask a professional or an experienced investor to help guide the process.