How Does a Hard Money Lender Value My Property?

Question

When making a loan, a bank and hard money lender have different opinions when it comes to determining the value of the property. The appraised value is really not that important to a private lender. Instead, a hard money lender would use the value of the home as if they were to sell the home in 30-90 days. This is often called, “Fire Sale Value.” What’s more important to hard money lender is the liquidity of the property if the borrower defaults.

Banks will usually go with a standard appraised value. In the current climate of course, most banks are lending on purchase price and using that as the “value.” What’s more important to the bank is the ability of the borrower to pay back the loan, not the liquidity of the property.

Any comments on this topic? Please share.

Ann Bellamy · Answer

The problem with generalizing about hard money or private lenders, is that each one is different.  And private lenders, as Don Konipol says, may be acting as hard money lenders, but criteria can be different.  In fact, the one consistency amount hard money and private lenders is that each one has their own criteria.

The more time we spend in the real estate world, the more we realize how subjective an appraisal can be.  Even the borrower's comps are not used initially, because we want to see what they skipped over that would support a lower value.

In our case, we want to be sure that in a worst case scenario, we come out whole.  We don't want to foreclose.  It's too expensive, takes too long, and the costs mount quickly.  So more and more frequently, the borrower's ability to pay  is critical.  That can be based on their ability to deliver a project and sell it quickly, in the case of rehab flips.  Or their cash reserves and their willingness to step up and do whatever is necesseary to make the lender whole.

So while private lenders that are friends, family and close business associates rely on the character of the borrower, and not the property, it is becoming increasingly common for hard money lenders to put more weight on that aspect.

I've spoken to a number of conventional hard money lenders in my area who used to rely strictly on value, and now are putting more emphasis on other soft criteria.  And again, each lender is different, and each deal is different.

Jeff S. · Answer

Appraisals are meaningless, Corey Dutton, and the ARV plays a very minor role in our loans.  If your loan is low enough, as a lender you don’t have to predict ARV too precisely.  On the other hand, the borrower, who will ultimately sell at this price, must be extremely precise.  In spite of this, our goals are the same.

Naturally, we want to be repaid and we want to earn a profit along with our borrower.  If we have to take a property though, we at least want to be able to get out whole.  As long as the amount we loan is low enough to appeal to another flipper, and we don’t use a fixed formula, we should be able to resell the house quickly and get out with our shorts.

That is, our criteria as a lender is to understand what another flipper would quickly pay, not the end buyer.  No appraisal will tell you that.

Jeff

Aaron Mazzrillo · Answer

I just signed HML loan docs today. The HML I used has an appraiser on staff who does their own appraisal. They lend 60% of the appraised value. If the property needs significant amount of work, they withhold some of the funding and release it as the work is done and verified by one of their staff. I have purchased property far enough below their appraised value that I have gotten a small check out of escrow. It doesn't happen often as they like you to have some skin in the game, but every once in a while we get one through.

Private lenders are generally putting more trust in the person than the deal. I have never had one of my private lenders ask me for an appraisal. I have no problem buying them one if they want it, but I offer and they say no. I do send some comps over and my estimates of repairs. The criteria a private lender will fund on is 100% dependent on the private lender and your relationship. Everyone has their own tolerance of risk.

My only advice about banks is to stay on the tile and off the carpet. The carpet is where you get in trouble. You'll never get in trouble staying on the tile.

Andy M. · Answer

Aaron, you are hilarious! I had to read this last part of your post twice before I got it. Hope your spending some quality time on the river. ;)

Corey Dutton · Answer

Well said Ann. I agree with you completely.

Don Konipol · Answer

Corey, you are using the terms private lender and hard money lender interchangably.  While often private lenders are hard money lenders and vice versa, this is not neccessarily true.

Also, you are implying that hard money lenders are not interested in the borrower's ability to pay back the loan.  While some private lenders may be "lending to own", all hard money lenders are interested in the borrower's ability to pay back the loan as property ownership is not part of their program.  With the crazy quilt of foreclosures, temporary restraining orders, bankruptcies, etc., the last thing a hard money lender wants is to have to try to foreclose on a property for non payment.  The cost of foreclosing if the borrower uses delaying tactics and is willing to pay a good attorney can be quite a large percentage of property value.

Loc R. · Answer

Banks don't lend on fixer-uppers; HMLs do.

HMLs understand what the ARV should be and normally cap at 65% of that number.

How Does a Hard Money Lender Value My Property?

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