Hard Money Lenders: The Art of Valuing Properties
As more and more people are turned down for traditional investment loans by banking institutions, due to political gridlock and advanced regulations, investors are turning to hard money lenders in times of need.
Hard money lenders, such as Loan Funding Co., are a direct hard money lender that offers loans ranging from $50,000 up to $25 million. Without the middleman and the hassle of working with difficult underwriting teams, many hard money loans offer bridge loans and commercial loans, perfect for real estate developers and investors.
One of the most common questions is how do hard money lenders determine a property’s value? There are several key elements they take into consideration, including:
- Appraisals – While this is the most recognized source of valuing real property, some mortgage brokers and underwriters disregard appraisal value, which is shocking and often leaves potential borrowers scratching their heads. While an appraisal is a certified professional that is licensed to provide property valuations, more banks are looking at the difference between what buyers are willing to pay versus what they are able to pay. Most businesses around the U.S. have less cash than they did a decade ago, ultimately meaning that traditional banks will not loan to even successful businesses.
- Tax Valuation – Lenders typically research the local tax value based on Assessor’s records; however, it is important to note that this does necessary indicate a precise value. Assessors typically drive past residences and do not go inside, meaning they cannot give a true evaluation of a home and/or property’s value. Additionally, some Assessor’s are overworked, having more than 1,200 accounts, even in smaller cities. Obtaining an accurate price opinion is difficult and tax valuations do not necessary happen annually. Some counties only assess property values once every four years, but yet property values can vary dramatically within a matter of months, as the real estate fallout in 2006 has accurately demonstrated. Additionally, when an Assessor agrees to lower a taxed value, they are receiving less funds for that real estate investment, so it is not necessarily easy to have a home reassessed by a government office.
- BPO (Broker’s Price Opinion) – Real Estate Broker’s are often asked to provide a BPO, which is an indication of what he/she believes is the current value for a piece of real property. Often times, Real Estate Broker’s may error on the side of maximizing the potential value, which can lead to an overly optimistic opinion of the local real state market. Hard money lenders do not want an optimistic opinion, but a realistic one.
- Common-Sense Approach – Many private money lenders are asking themselves the simple questions, “If the real estate market bottoms, do I want to own this piece of property? Do I stand to make a profit from loaning on this real estate investment?” These types of questions, combined with one or all of the above property valuation methods is really what collateral lending is about in today’s real estate market.
Most hard money lenders do not have a set answer about how they value properties, using a combination of tactics and approaches to determine what properties are worth residing in their short-term and longer-term portfolios.