Unlike the traditional loans from a conventional bank, the lending requirements for hard money loans are different. 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 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 a 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.
Different things that might be addressed in the appraisal
Appraisal: It provides info on sold, and comparable properties, in addition to photographs of them. The appraisal provides an analysis of the property data to support it’s value.
Broker Price Opinion: This is a broker’s assessment of value. It’s much shorter than an appraisal. BPO’s are only as good as the broker making it. You want to find a broker to review the property who can put in the hard work necessary to have an unbiased assessment.
Appraisal Review: Once you have the appraisal you can request, and pay, for another appraiser to review the appraisal you obtained.
Personal Drive By: This is called driving the comps. It’s done when you have a few points of value. You should drive a few of the sold comps, pending comps, and active comps, and then make an assessment of what you think the property is worth.
Location: Many hard money lenders will look at the location of the property – before approving the hard money loan.
Parking: For commercial loans, lenders look at things like parking spots. Lack of spots can reduce the value of the property and it’s appraised value.
Permits: It’s important that you show a hard money lender that the necessary permits have been filed. Depending on your project, you might need new or updated permits. In some cases, inspectors have been known to require entire buildings to be brought up to code due to codes being changed.
Environmental: It’s important you remain aware of properties that haven’t had a Phase I, or if needed, a Phase II environmental study to look at past uses of the property.
Income: Many rental property values are determined as a multiple of the net operating income. It’s important you provide hard money lenders with realistic projections.
Vacancy Factor: This is another important item. You want to make sure you look at similar properties, and see if the financial analysis of the property is correct.