What to check on a hard money term sheet before you pay for the appraisal

Question

The appraisal is usually the first real money you spend with a lender, and it's mostly non-refundable. So the time to find a problem with the loan is before you pay for it, not after. Here's what I'd read for on any fix and flip or bridge term sheet.

What the leverage is based on. "Up to 90%" means nothing until you know 90% of what. Purchase only? Purchase plus rehab? And what's the ARV cap that sits on top of it? A lot of deals that look fully funded get cut back because the loan also can't exceed a set percentage of ARV, and that second limit is the one that actually binds.

How the rehab money is released. Is it held back and paid out in draws, and who orders the draw inspection? How long from request to funds? Ask what a normal turnaround looks like and what the fee per draw is. Slow draws stall contractors, and stalled contractors cost you more than a slightly higher rate.

The total cost, not just the rate. Points, origination, underwriting, processing, doc prep, draw fees, extension fees. Add them up and compare on a dollar basis for your expected hold. Two quotes with the same rate can be thousands apart.

Extension terms. If the project runs long, what does another month or three cost, and is the extension automatic or at the lender's discretion? That answer matters a lot more on a 6-month loan than people expect.

What's conditional. Almost every term sheet is subject to appraisal, title and a background check. That's normal. What you want to watch for is vague language around the rehab budget review or "final credit approval" that leaves room for the terms to change late in the process. Ask directly what could change the loan amount after the appraisal comes back.

I'll be upfront that I work at a private lender, so I write these and read plenty of other people's. Curious what others always check that I left off.

Cat Rauh · Answer

@Christian Wamsley that's a really good add, and the first draw is the one that catches people. Most draws are reimbursements, so the borrower pays for that first phase of work out of pocket and gets it back once the inspection clears. On a bigger rehab that can be a real chunk of cash for a few weeks.

Two things that help: ask the lender how long draws actually take from request to funds, and line up your contractor's payment schedule to match it so nobody's waiting on money they were promised. Some contractors will front the first phase if they know the draw timing is reliable.

And you're right on liquidity. A lender looking at reserves isn't being difficult, they're checking that the project can survive a slow month.

Ametria Chaney · Answer

Great breakdown, Cat — this is exactly the fine print that surprises borrowers right when they're most committed. From the agent side, the one I'd underline is how term sheets affect the deal timeline: I've watched buyers get blindsided when draw turnaround takes weeks instead of days, and contractors walk off the job in the meantime. The total dollar cost comparison is the other big one — two lenders at the same "rate" can be thousands apart once you stack points, origination, underwriting, doc prep, draw fees, and extension costs. And extensions: always ask what another month costs before you need it. Knowing the real number before paying for the appraisal is exactly when you still have leverage.

Juan Hasbun · Answer

That's a solid list. The only items I'd add from the private lending side are:

One thing I've found over the years: the best question a borrower can ask before ordering an appraisal is:

A good lender will usually give a straightforward answer. If they can't identify any potential issues, they probably haven't reviewed the file closely enough. If they can clearly explain the risks upfront, that's often a sign you're dealing with a transparent lending partner.

The appraisal is important, but most loan surprises come from the details around leverage, conditions, reserves, and exit strategy, not the appraisal itself. That's where I'd spend my time before writing the first check.

Mike Klarman · Answer

Lenders will always advertise max terms. Up to 90 or Up to 100. Close as fast as 7 days. Up to 80% LTV.

What you need to understand more than the lending terms, IMO is your scenario you are proposing for finance. Did you shave 10% off the ARV and run the numbers? Did you project 30% longer timeline than expected? Is the contracting budget real, encompassing, and executable? How are the market trends for appreciation. Spikes are monthly? Weekly? Quarterly?

Most times deals fail, investors fail because they are a stranger to their scenario. The appraisal is the first firewall. The first 3rd party opinion of the project. If the appraiser has different feelings/evidence than you, you two may disagree and that will kill/save you. I say save cause if you got funded on the bad deal you'd lose more than the $700 for the appraisal.

Christian Wamsley · Answer

Cat, great breakdown! You covered several areas I wish more investors understood before committing to a lender.

One thing I'd add from the broker side is making sure the borrower understands their total cash requirements, not just their down payment.

I've seen investors get excited about 90% purchase financing and 100% rehab coverage, only to realize they still need substantial funds for closing costs, reserves, and getting the renovation started before their first draw.

Before ordering an appraisal, I like to make sure we've addressed three things:

• Has the lender reviewed the borrower's credit, experience, and available liquidity?
• What is the estimated cash to close, including lender fees, reserves, and other closing expenses?
• How much additional cash will the borrower need to keep the project moving until the first rehab draw is reimbursed?

Has the lender reviewed the borrower's credit, experience, and available liquidity?

What is the estimated cash to close, including lender fees, reserves, and other closing expenses?

How much additional cash will the borrower need to keep the project moving until the first rehab draw is reimbursed?

I'd also want to know whether the lender has any concerns with the property or proposed scope of work before the borrower starts spending money.

As a broker, I believe part of my responsibility is helping borrowers understand these requirements upfront, rather than allowing surprises to surface during underwriting.

The question I always want answered is: If everything goes according to plan, how much money does my client actually need to get this project funded and keep it moving?

The fewer surprises we have going into closing, the better experience everyone has.

What to check on a hard money term sheet before you pay for the appraisal

5 Replies