How does a hard money lender value property?

In today’s real estate world, obtaining a loan is no longer a matter of “when” but a conditional “if.” Traditional banking institutes, heavily slapped by Big Government’s ever-domineering hand – are now required to follow stringent regulations that makes the loan process more difficult than ever before.

When a real estate investor is faced with rejection by a traditional banking institute, often the only remaining financing option is a hard money lender. One of the most commonly asked questions is, “How does a hard money lender value property?” There are a number of methods used by hard money lenders, including:

• Appraisals – Often the most recognized and valued source for a property’s valuation, appraisals are often the ultimate authority on value. Appraisals are simply the professional opinion of an educated, licensed appraiser. However, sometimes even appraisers forget that a property’s true value is what someone is willing and able to pay. Recently, the real estate market is witnessing that value is less about what buyers are willing to pay and consistently becoming about what they are able to pay.
• Tax Valuations – Sometimes this can serve as a benchmark for valuing a property and hard money lenders will check values with local county assessor departments. However, this is not always a dependable source of information, as sometimes tax values can lag in either positive or negative directions, as they don’t occur every year, but sometimes every four years.
• Broker Price Opinion – Known as a BPO in the industry, this is an economical solution to valuing a property. Combining a local real estate expert’s knowledge of the local market and industry, BPO’s can be used for worst-case and best-case resale and value scenarios.
• The Common-Sense Approach – While this is rarely used, it is seeing a comeback in the real estate market. This method is often described as “old school” but the bottom line is that it’s simple, fast and reliable. Ultimately a lender can ask him/herself, “If the borrower were to foreclose, would I want to own this property?” Lenders don’t want to own properties that they can’t unload in emergency-type situations.

Ultimately, borrowers must remember that hard money lenders are also investors. They’re not a banking institution, but one that relies on personal funds from investors to jump start real estate projects. Their investors expect an interest return on their investments, and if they’re not able to provide that return, they have failed as a company.

Just as with any profit making company, if the market isn’t right, hard money lenders are not going to loan on everything that comes their way. They too need to be selective about the properties they invest in, as they are looking for guaranteed returns that aren’t simply marginal but profitable.