Unlike the traditional loans from a conventional bank, the lending requirements are few and far between with hard money loans. Although there are only a few requirements, much of the weight in the approval process rests more heavily on the appraisal. If you are in need of funding to flip a home or invest in commercial property, you want to make certain your appraisal comes back correct.
Here is how the appraisal will affect the hard money loan;
The Hard Money Loan Process
Imagine needing cash to flip a property next month or to invest in a string of commercial properties ready for development. When time is money, the last thing that you want to do is to sit with a branch manager at the local financial institution. Not only will you be required to have your credit scores and history gone over with a fine-toothed comb, but the risk department will need weeks if not months to even consider your application. By the time they make any determination, your opportunity will be long gone.
This is where the hard money loan comes in, the perfect choice for borrowers who need funding fast. The most important factor in determining if you qualify is providing the investors an appraisal on said property.
The After Repair Value of Property
While the local financial institution is concerned about your credit worthiness and all the dings on your credit history since you were a teenager, the hard money investors are focused on two things. They want to know the value of the property now and the after repair value, known as the ARV. This is a huge determining factor for investors, because if the appraisal shows the property will be worth significantly more after the loan and work is completed, they are more likely to move forward with the funding.
Regardless if you have plans to complete a strip mall by next season or you have a buyer lined up after you flip a house, the after repair value must be significant so the investor feels they are in the best position to get their money back plus interest in the agreed upon time.
Making Certain the Numbers Match
It might be one thing to approach a lending institution and be in a position to work the numbers so they might fit, this is more challenging with the hard money loans. The local bank will be looking and a number of factors to rate your eligibility, but with the hard money loan investor they are placing most of their decision based on the appraisal. There really is no room to get it wrong here, so extra care should be taken to have a qualified team appraise the property now, determine the exact cost to make repairs, and the value after the work has been completed.
Make no mistake about it, investors have a team at the ready to go over those number to the letter. If you are not accurately representing the values across the board, it could be the reason the investors walk away. The most important thing to do is to simply represent your financial needs accurately so the investors can trust you, the rest will simply fall into place.
Meeting the Investors Part of the Way
Let’s assume that you provided the investors for the hard money loan all the appraisal information they needed. Let us also assume that after they carefully reviewed the numbers, the gap is too close for them to make the investment. Because you accurately represented yourself and your needs, the investors may be willing to afford a little leeway here in order to complete the deal. Since you made a solid effort to represent the numbers as they were, these investors can come up with some creative ways that allow you to meet them part of the way while helping them feel confident in the deal at the same time.
Depending on how far away the numbers or the comfort level of each investor, creativity and your compliance will certainly play a part in how much flexibility they have. Perhaps the investor is ready to deal, but they want you to put up your home residence as part of the collateral. Some investors might ask you put your retirement account on the line as part of the deal, so be prepared for creative alternatives if the investor wants to make a deal.
Hard Money Loan Appraisal Conclusion
Since so much is riding on the appraisal of the property in question, it is important to make certain the numbers match up before requesting investors fund your endeavor. These investors are very savvy with their money, so they are going to eventually request the appraisal in order to make the determination if this risk is something they would consider.