We Do LTV Differently
At Fairfield we approach LTV’s in a way you’ve probably never seen before. We thought a quick primer would help you think like we do and put your loan requests to the head of the class.
When it comes to LTV’s use two. We use a Front End LTV (F-LTV) as well as an After Repair Value (ARV) or Final LTV (LTV) basis. We do this to analyze risk at the start of the loan and again when the project is finished. This is to make sure that our investors’ capital is protected going into the loan as well as coming out of it (and throughout the construction process as well).
Let me give you an example. Say you have a property that is worth $150,000 'as-is' and you are buying it for $90,000. The most we could lend you toward the purchase of the property would be $105,000, or 70% of the value of the property 'as-is', before any construction (note: max LTV’s can vary, so it always helps to ask). As a result, you would need to get the pay-off, closing costs and interest reserve to add up to be under $105,000. Keep in mind that interest reserve is optional, so if you don’t need it you can drop it from the calculation. Here’s the formula:
Front End LTV =
Pay-Off + Closing Costs + Interest Reserve (Optional)
As Is Value
This calculation should be under 70%. If it isn’t, you can drop the interest reserve, bring in some cash, bring some additional collateral or have the seller take a ‘carry back’ and subordinate it to our loan. Whatever it takes to build in some equity. The lower this number is the better. You’ll get better interest rates and a greater chance of approval. If you come in with an F-LTV of 65% or under, you’re looking very good.
For us, F-LTV is the more important of the two LTV’s. This number must work or you’re not even getting to first base. Also, if this number is in line, your LTV’s will stay in line to the end. This is because once you start the construction you’re adding value to the property by more than the cost. So, theoretically your LTV should go down or stay the same as when you started building.
Once the F-LTV is in line we can then talk about construction costs. Obviously construction adds value. We hold the construction funds in a construction draw account so we can make sure that this is proceeding on time and on budget and control the risk for the investor. Basically we make sure you’re adding value as you go with the work you’re doing.
Once you’re done with construction, we can talk about the ARV or Final LTV. The formula for this is:
Final LTV (or the more traditional ARV) =
Total Loan Amount (now including construction)
Future Value
That’s it. Once you get the hang of it you’ll understand why it’s a good tool. If you come to us with these numbers ready to go, you’re way ahead of everyone else.
Richard Sundvall
Senior Loan Coordinator
Fairfield Financial Services, Inc.
sundvall@privatemoneysource.com
971-227-1023 voice
