{"id":2120,"date":"2023-07-24T12:11:42","date_gmt":"2023-07-24T12:11:42","guid":{"rendered":"https:\/\/blog.calhardmoney.com\/?p=2120"},"modified":"2023-07-24T12:14:30","modified_gmt":"2023-07-24T12:14:30","slug":"price-v-value-the-lenders-view","status":"publish","type":"post","link":"https:\/\/www.calhardmoney.com\/blog\/price-v-value-the-lenders-view\/","title":{"rendered":"Price v Value: The Lender\u2019s View"},"content":{"rendered":"

Lenders use two valuation methods when underwriting a loan application for a fix-and-flip transaction: price<\/em> and value<\/em>. As a hard money lender in Los Angeles<\/strong><\/a>, I thought it necessary and helpful to explain the distinct differences in these definitions and how they are used in a lender\u2019s underwriting.<\/p>\n

Price<\/strong><\/h2>\n

A seller\u2019s price to the market for their property can reflect emotion and motivation. Hopefully, but not always, a seller seeks the advice of a Realtor to determine a price that a buyer is willing to pay. Knowledge of the market conditions and the prices of comparable properties will enable the investor to recognize where the offered price falls within the values in the market.<\/p>\n

Therefore, price is subjective and often reflects a seller\u2019s perception of value and motivations to sell. An investor must compare the offered price against the at-market value and determine the reasons for any variance.<\/p>\n

Sellers\u2019 and buyers\u2019 agents walk the fine line between what sellers offer and what buyers are willing to pay. This price, offered and accepted by the parties, is the cost a lender will use in its underwriting for the acquisition portion of a loan.<\/p>\n

Values<\/strong><\/h2>\n

For a fix-and-flip opportunity, a lender considers value from two angles: the \u201cas is\u201d value (the value) and the after-repair value (ARV). Price is often the as-is value. The ARV is the value created by the renovations.<\/p>\n

As-Is Value (Value)<\/strong><\/h2>\n

This value is the appraised value of a property in its as-is condition at the time of the sale and before any improvements. This value is based upon the market conditions of the area and the size, condition, and features of the property. The appraisal supports this value.<\/p>\n

Although there is some subjectivity in interpreting the current market conditions and the adjustments made to comparable properties, this value is supported by research and without applying a seller\u2019s motivations.<\/p>\n

For fix-and-flip opportunities, appraisers commonly use the comparable sales approach.<\/p>\n

The After-Repair Value (ARV)<\/strong><\/h2>\n

The ARV is the value created by a renovation scope. For the renovation scope to be a sound investment, the property\u2019s ARV must exceed the acquisition price and the renovation costs.<\/p>\n

The value-add opportunities are in the work scopes that include adding a bathroom, upgrading a kitchen, and replacing a roof, floor coverings, and windows.<\/p>\n

It is important to note that upgrades and replacements add to the property\u2019s market value. Repairs and deferred maintenance items will help the property sell faster and achieve offers closer to the list price but will not affect the value.<\/p>\n

The Underwriting<\/strong><\/h2>\n

A private lender will consider costs and values when underwriting a fix-and-flip transaction. Generally, the maximum loan amount is determined by taking the lesser of:<\/p>\n