Hard Money Appraisal: What You Need to Know

If you are looking for a fast and flexible way to finance your real estate investment, you may have heard of hard money loans. These are short-term loans secured by the value of the property you want to buy or renovate. Unlike conventional loans, hard money loans are based on the after-repair value (ARV) of the property, not on your credit score or income. But how do hard money lenders determine the ARV of the property? That’s where hard money appraisal comes in.

What is a Hard Money Appraisal?

A hard money appraisal is a professional assessment of a property’s value conducted by a licensed and insured appraiser. The appraisal is not just another box to check off – it’s a cornerstone of the hard money loan journey. Lenders rely on the appraisal to determine the loan-to-value (LTV) ratio, which influences the total loan amount. Typically, good LTV ratios should be no greater than 85%, with most hard money lenders offering loan amounts of 65% to 85% of the collateral property’s value.

How is a Hard Money Appraisal Different from a Traditional Appraisal?

A hard money appraisal differs from a traditional appraisal in several ways. First, a hard money appraisal focuses on the potential value of the property after it is repaired or improved, not on its current condition. This means that the appraiser will take into account the scope of work, the budget, and the expected return on investment of the project. Second, a hard money appraisal is usually faster and more flexible than a traditional appraisal. Since hard money lenders have their own network of appraisers, they can order and receive an appraisal within days or even hours, depending on the urgency of the deal. Third, a hard money appraisal may cost more than a traditional appraisal, depending on the complexity and location of the property. However, this extra cost may be worth it if it helps you secure a better deal and close faster.

What are the Key Components of a Hard Money Appraisal?

Appraisers accurately assess the value of a property by looking at three key components:

The property itself: The appraiser will examine the property’s physical condition, such as structural integrity, state of repair or disrepair, quality of existing renovations, size of the lot or yard, and square footage of the living space. Additionally, the appraiser will note any unique features or improvements that could add value, such as a swimming pool, or a renovated kitchen or bathroom.
The local real estate market: The appraiser will consider important factors such as the desirability of the neighborhood, local amenities, and trends in property values. They will also take into account economic factors that could influence the local real estate market, such as job growth in the area or recent changes in the mortgage interest rates.
Comparable sales of similar homes in the same area: The appraiser will use recent sales data to find comparable properties that have similar characteristics and features as the subject property. They will then adjust the sales prices based on differences in condition, quality, size, location, and other factors to arrive at an adjusted value for each comparable property. The appraiser will then use these adjusted values to calculate an average value for the subject property.

How to Prepare for a Hard Money Appraisal?

If you want to get the best possible value for your property and secure a favorable loan amount, you need to prepare for a hard money appraisal. Here are some tips to help you:

Provide accurate and detailed information about your property and your project to your lender and your appraiser. This includes information such as purchase price, repair costs, scope of work, timeline, expected ARV, and comparable properties.
Make sure your property is clean and accessible for the appraiser. Remove any clutter, debris, or personal belongings that may interfere with the inspection. If possible, make some minor repairs or improvements that could boost your property’s appeal and value.
Be present during the appraisal and answer any questions that the appraiser may have. You can also point out any features or benefits that may not be obvious or visible to the appraiser.
Be respectful and professional with your appraiser. Don’t try to influence or pressure them to give you a higher value than what they think is fair and realistic.

Frequently Asked Questions (FAQs)

What is a hard money loan?

A hard money loan is a short-term loan secured by the value of a real estate property. Hard money loans are typically used by investors who need fast and flexible financing for buying or renovating properties.

How do I find a hard money lender?

You can find a hard money lender by searching online, asking for referrals from other investors, or working with a mortgage broker who specializes in hard money loans.

How do I qualify for a hard money loan?

To qualify for a hard money loan, you need to have a property that has enough equity or potential value to serve as collateral. You also need to have a clear exit strategy, such as selling or refinancing the property within a short period of time. You don’t need to have a good credit score or income to qualify for a hard money loan, but you may need to pay higher interest rates and fees than conventional loans.

How long does it take to get a hard money loan?

It depends on the lender, the property, and the deal, but generally, you can get a hard money loan within a few days or even hours after you submit your application and provide the necessary documents. The appraisal is usually the most time-consuming part of the process, but it can also be done quickly if you work with a reputable and experienced appraiser.

What are the pros and cons of hard money loans?

Some of the pros of hard money loans are:

They are fast and flexible, allowing you to seize lucrative opportunities in the market and close deals quickly.
They are based on the value of the property, not on your credit score or income, making them easier to qualify for than conventional loans.
They can finance properties that are in poor condition or need extensive repairs, which may not be eligible for conventional loans.

Some of the cons of hard money loans are:

They are expensive, with higher interest rates and fees than conventional loans.
They are risky, with lower LTV ratios and shorter repayment terms than conventional loans. If you fail to repay the loan on time or sell the property at a profit, you may lose your property or end up in debt.
They are not regulated by the government, which means that there may be less protection and recourse for borrowers in case of disputes or fraud.

Conclusion

A hard money appraisal is an essential part of getting a hard money loan for your real estate investment. It determines how much money you can borrow based on the potential value of your property after it is repaired or improved. A hard money appraisal is different from a traditional appraisal in terms of speed, flexibility, and focus. A hard money appraisal looks at three key components: the property itself, the local real estate market, and comparable sales of similar homes in the same area. To prepare for a hard money appraisal, you need to provide accurate and detailed information, make sure your property is clean and accessible, be present and helpful during the inspection, and be respectful and professional with your appraiser.

We would love to work with you.