Theory is important, but execution is what matters. To truly understand how After Repair Value (ARV) and hard money financing interact to create profit, let's walk through a hypothetical—but highly realistic—fix-and-flip case study in Orange County, California.
The Deal and The Numbers
An investor finds a distressed 3-bedroom home in Anaheim. The negotiated purchase price is $600,000. Based on comparable sales of fully renovated homes, the ARV is determined to be $850,000. The estimated rehab cost is $75,000.
The hard money lender offers 80% of the purchase price and 100% of the rehab costs. The investor brings a $120,000 down payment plus closing costs.
Calculating the Net Profit
The project takes 4 months. The investor pays $16,000 in interest and holding costs over that time. After completing the rehab, they sell the home for the $850,000 ARV.
Deducting the purchase price, rehab, hard money costs, and the 6% agent commissions on the sale ($51,000), the investor walks away with a gross profit of approximately $108,000 on a 4-month project.
Running detailed, conservative numbers before acquiring a property is the hallmark of a professional investor. Let the ARV dictate the deal.
Going over budget on the rehab or the market softening during the project, resulting in a sale price below the initial ARV estimate.
Fidelity Funding Corp · Direct California private money lender since 2006
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