Understand the numbers before you fund the deal.

After-Repair Value, or ARV, is an estimate of what a property might sell for once planned renovations or repairs are finished. It is not a guaranteed future sale price. It is a working estimate used to think through the deal.

ARV is commonly built from comparable sales of similar, recently renovated properties in the same area. The most useful comps share key traits with the subject property: condition after work, location, size, property type, and the timing of the sale.

• ·Condition matters. A freshly renovated comp is more useful than a dated one.
• ·Location matters. The closer the comp, the more relevant the sale price.
• ·Size and property type matter. Square footage, beds, baths, and lot size affect comparability.
• ·Recent sales matter. Older sales may not reflect the current market.

Lenders may use ARV, along with other factors, to help determine a maximum loan amount. Because it is only an estimate, conservative assumptions usually produce stronger deals.

Loan-to-Cost (LTC) compares the loan amount with the total project cost. Loan-to-Value (LTV) compares the loan amount with the property’s current or projected value.

Total project cost may include the purchase price plus eligible renovation or construction costs, depending on how the lender defines it. Lenders may calculate both LTC and LTV, then use whichever produces the lower loan amount.

Maximum leverage is not the same as the borrower’s actual cash requirement. Closing costs, reserves, prepaid items, and renovation expenses advanced before reimbursement can all increase the cash needed beyond the down payment.

Debt Service Coverage Ratio, or DSCR, compares the qualifying rental income for a property with its debt obligation. A higher DSCR generally indicates stronger cash flow relative to the loan payment.

The calculation is not always limited to the loan payment. Taxes, insurance, association dues, flood insurance, and other required expenses can affect the way a lender underwrites the property’s cash flow.

The income used may be market rent, an existing lease, or the lower of the two, depending on the lender and the program. DSCR requirements vary by lender and loan program, so a property that fits one lender may not fit another.

With many renovation or construction loans, the lender holds back the renovation funds and releases them in stages as work is completed. This is commonly called a draw schedule.

The borrower may need to complete and pay for work before being reimbursed. Draw requests can require invoices, receipts, photographs, inspections, and lien waivers from contractors. Inspections and processing can delay reimbursement, so investors should maintain enough liquidity to keep work moving between draws.

• ·Some lenders charge draw fees or inspection fees.
• ·Draws are typically tied to a defined scope of work and budget.
• ·Work must usually be verified before funds are released.

That is why the construction budget and draw schedule should be understood before closing. Surprises in either one can slow the project and strain cash flow.

The cash required to close a deal often includes more than the borrower’s equity contribution. Understanding the full picture helps investors avoid shortfalls.

• ·Down payment or required borrower equity
• ·Lender origination, underwriting, processing, and administrative fees
• ·Appraisal and inspection fees
• ·Title search, title insurance, escrow, attorney, recording, and closing fees
• ·Builder’s risk or vacant-property insurance
• ·Flood insurance when the property is in a flood zone
• ·Prepaid property taxes and insurance
• ·Interest collected at closing
• ·Required liquidity or reserve funds
• ·Renovation expenses advanced before reimbursement
• ·Utility deposits
• ·Permit costs
• ·Contractor deposits
• ·Potential extension fees if the project exceeds the original loan term

Required reserves may not be spent at closing, but the lender may still require proof that the borrower has those funds available. Reserves are a cushion, not an optional extra.

An exit strategy is the plan for repaying the loan when it matures. Common exits include selling the renovated property, refinancing into a long-term rental or DSCR loan, holding the property with the current financing when permitted, or paying off the loan using another approved source.

The exit strategy should be selected before closing because it shapes the financing structure. A fix-and-flip loan, for example, is usually short-term and assumes a sale or refinance. A DSCR loan is built around holding and renting.

Several factors can affect whether the planned exit works:

• ·Loan maturity dates and extension options or fees
• ·Market conditions at the time of sale or refinance
• ·Appraisal results, which affect refinance proceeds
• ·Rental income and occupancy for hold strategies

A strong deal usually has a primary exit and a backup plan. Relying on only one outcome can create unnecessary risk.