How Does an Appraisal Affect a Hard Money Loan?

If your credit history or other factors are preventing you from getting a traditional loan from a conventional loan, you may wonder how the loan requirements for hard money loans can help. But one thing many people don’t realize is that loan requirements for hard money loans are different. There are different requirements and a great deal of the weight of approval rests in how much the appraisal is worth.

Whether you want funding in order to fix and flip a home, or you want to invest in commercial property, making sure your appraisal is correct is very important. Understanding how a home appraisal affects your ability to get a hard money loan is part of the overall process, so let’s take a closer look:

What is the Hard Money Loan Process Like?

When you need fast cash to flip a property or you want to invest in commercial property that’s prime for development, you’ll discover that waiting around with a branch manager at a bank is the last thing you really want to deal with. Not only will you need solid credit scores, but the bank is going to go through your documentation and paperwork with painstaking attention to detail.

By the time the bank decides whether or not your loan is approved, the opportunity to invest or flip the home may have long since passed you by.

A hard money loan can help. Unlike with a conventional loan from a traditional bank, the most important feature in getting approved for a hard money loan is the appraisal on the property you want to put up as collateral.

Banks are different in that they look primarily at you, the borrower. They want to look at your creditworthiness and pore over your credit history carefully. Hard money investors are interested in how much your property is worth now (if it’s a fix and flip property) as well as what it will be after repairs, known as the ARV or After Repair Value.

Investors are willing to loan you money often regardless of your credit history because if a property demonstrates that it will be worth considerably more after the work is done, they’re much more likely to recoup their investment and thus are more likely to loan you the money you need.

What Gets Mentioned in Your Appraisal?

There are lots of different points that can be mentioned in the appraisal itself. If you haven’t had an appraisal done before, you may be wondering what different terms mean.

For example, the appraisal itself will detail what comparable properties in the area have sold for, as well as include photos of them. It analyzes the property data to support the valuation.

Another term you may come across is the BPO or Broker’s Price Opinion. It is shorter and it is often a good idea to find a broker that will review your property and give it an unbiased assessment.

You can even pay another appraiser to, essentially appraise the appraisal you’ve had done to verify its accuracy and legitimacy.

If the property has a few points of value, you’ll want to get involved with what’s known as “driving the comps”, essentially this is a collection of sold comps, pending comps and active comps which are all incorporated into an assessment of what you think the property could be worth.

Hard money lenders also look at the location of a property before they’ll consider approving the loan. Commercial lenders will look at things like parking spots.

And finally, hard money lenders want to be sure that you have filed the necessary paperwork and obtained permits. Depending on the project, you may need to update those permits or get new ones. Property inspectors in the past have required investors to have whole buildings brought back up to code simply because the codes have changed.

It’s also a good idea to consider past uses of the property, and having a Phase I or Phase II environmental study done if it hasn’t been done already.

How To Make Your Property Stand Out

As hard money lenders often see many promising properties and there’s a lot of competition for private funding, there are a couple of things you can do to make your property stand out. The first is providing lenders with realistic projections of the income you expect to make. The value of rental properties is generally determined as a multiple of your net operating income.

And finally, you’ll want to check out similar properties and see if their own financial analysis is correct — an item known as the Vacancy Factor.

In short, investors are going to want to understandably lower their risk. As such, by taking steps to have the home properly appraised and valued before approaching a hard money lender is a smart way to get the funding you need as well as demonstrate that you’ve done the necessary legwork to ensure that the property is a lucrative investment for everyone involved. If you need more information regarding hard money lending, please call a hard money lender in Los Angeles today.