How ARV works, and why the lender's number is the one that counts
After-repair value decides how much of your project gets financed. Here is how it is arrived at, and why it is often lower than the borrower expects.
Biscayne Lending 4 min read
Every renovation loan turns on one number that does not exist yet: what the property will be worth after the work is finished. That is the ARV, the after-repair value, and it is usually the number that decides how big your loan can be.
Why the lender cares about a number that is not real yet
A fix and flip lender is financing a property in a condition nobody can see. Their protection is not today's value — today the house may be uninhabitable. Their protection is the value at the end, because that is what a sale or a refinance will actually pay them back from.
So the loan is usually sized against two ceilings at once, and you get the lower of them:
- a percentage of total project cost (purchase plus renovation), and
- a percentage of the ARV.
Which percentages apply is set by the lender and by your file. What matters here is the shape: if your ARV comes in low, the second ceiling drops, and the loan drops with it — even when nothing about your purchase price or your budget has changed.
A worked example
Say you are buying at $300,000 with a $90,000 renovation. Total project cost is $390,000. You and your contractor think it will be worth $520,000 finished.
Suppose this lender will go to 85% of cost and 70% of ARV.
- 85% of $390,000 = $331,500
- 70% of $520,000 = $364,000
The lower ceiling governs, so the loan is $331,500 and you bring the rest, plus closing costs.
Now the appraiser comes back at $460,000 instead of $520,000.
- 85% of cost is unchanged: $331,500
- 70% of $460,000 = $322,000
The ARV ceiling has dropped below the cost ceiling, so now it governs. Your loan falls to $322,000 and you have to find roughly $9,500 more at the closing table, on a deal you had already budgeted. This is the single most common way a flip gets into trouble before the first wall comes down.
Redo that arithmetic with your own numbers before you go under contract, not after.
How the ARV is actually arrived at
Not by you, and not by your contractor. The lender orders an appraisal — usually a subject-to appraisal, meaning the appraiser values the property subject to the completion of a specific scope of work.
That last part matters more than most borrowers realise. The appraiser is not valuing your ambition; they are valuing the scope of work you submitted. If your scope says "kitchen refresh" and your comparables are houses with new kitchens, new baths and an addition, the appraiser will not bridge that gap for you.
They will then find comparable sales — recently sold, nearby, similar in size and type, and in the condition yours will be in when finished. Those comps, adjusted, are the ARV.
Five things that make an ARV come in low
- Your comps are aspirational. The renovated houses you are comparing to are bigger, or on a better street, or have a garage you do not have. Square footage and lot size are the adjustments that hurt most.
- The scope does not match the comps. You cannot reach a renovated comp's value with a partial renovation. The scope has to actually get the house there.
- You added cost that does not add value. A new roof and a new panel are necessary and they are expensive, and they may add far less to the appraised value than they cost you. Necessary is not the same as value-adding.
- The market moved. Comps are backward-looking by definition. In a market that has softened since those sales closed, the appraiser will adjust down.
- There are no good comps at all. An unusual property in a thin market gives the appraiser very little to work with, and appraisers who are short of evidence tend to be conservative.
What you can do about it
Submit a detailed, line-item scope of work rather than a lump sum. An appraiser can only credit what is described. "Renovation — $90,000" tells them nothing; a scope that lists the kitchen, the two baths, the flooring, the HVAC and the windows lets them value each piece.
Pull your own comparables before you make an offer, and be harsh about them. Use sold, not listed. Use the last few months. Adjust honestly for size and condition. If your number only works using the single best sale in the neighbourhood, you do not have a number, you have a hope.
And budget for the ARV coming in under. The investors who keep going are the ones whose deals still work at a value below the one they were counting on.
What this does not tell you
The percentages in the example above are illustrative arithmetic to show the mechanism — they are not our terms and they are not a quote. Actual advance rates against cost and ARV vary by lender, by borrower experience, by property type and by market, and they are set in writing by a lender after underwriting.
If you want to know how a specific project is likely to be read, send us the deal with the purchase price, the scope and your comps, and we will tell you plainly what it looks like.
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General information, not legal, tax or financial advice. Loan terms come only from a lender, in writing, after underwriting. Licensing and compliance rules differ by loan type and state.