Hard money lenders offer a lifeline of fast cash to people who have neither the time nor the interest in dealing with conventional banks. Real estate investors certainly qualify. They may need fast money to close on a deal that would otherwise escape them if they had to wait weeks for a bank decision. With hard money, they can get the cash in time to jump on the opportunity.
Among the many differences hard lenders bring to the table is the way they determine whether or not a loan is worth making. A bank is going to look at the borrower’s income, credit history, etc. A hard money lender is going to look primarily at the value of an asset offered by the borrower as collateral.
Usually, this asset is real property. It could be a residential home, a commercial property, or even a piece of undeveloped land. Some borrowers offer multiple properties as collateral for their loans. The question then becomes one of how the hard money lender values those properties.
Actium Partners, a Salt Lake City hard money lender, says that most lenders in their business do not rely solely on a single method. They utilize several different valuation methods:
While hard money lenders do not rely exclusively on professional appraisals, that does not mean they do not utilize them. Indeed, they do. A professional appraisal gives the lender a good idea of what a property is worth on the open market. This is key. It matters not to the lender how much the borrower paid for the property. Lenders only want to know how much the property is worth to buyers if it had to be sold right away.
Tax records are good tool because they are easily accessible and offer a completely different perspective. A tax assessment is based on local perceptions of tax assessors who might look at hundreds of comparable properties in a given year.
A tax assessment can provide a little more evidence of a property’s current value. However, the downside is that assessors do not necessarily get to see inside buildings. Often times their assessments are based only on what they can see from the street.
Hard money lenders might look at what are called brokers price opinions (BPOs) as well. These are valuations put together by brokers who would value a property in preparation for selling it. They are opinion-based evaluations, but they tend to be more reliable than tax assessor valuations.
There is a downside to BPOs as well. Brokers hoping to sell a property might be tempted to inflate the value in hopes of garnering a higher sale price and commensurate commission. But a good broker who can command a higher price is just satisfying market demand. It is up to the hard money lender to weigh a broker’s opinion accordingly.
If you are familiar with mortgage lending, you’re familiar with the concept of loan-to-value (LTV) ratio. A mortgage lender might have an LTV of 75%. This means that on a house being purchased for $100,000, the lender will only put up $75,000. Hard money lenders work on a similar principle.
Most hard money lenders don’t go above 70% of the value of the property offered as collateral. Some keep their ratios as low as 50%. This is why borrowers sometimes have to put up multiple properties in order to get hard money. They know that, at the end of the day, the person approving the loan has to be confident he/she can recover the money by selling the collateralized property if necessary.
If you are looking into getting a loan for your home, you may also be interested in selling it all together for a fair price. For example, companies that buy houses in Portland are willing to give you top dollar for your home as is. This means you don’t even have to waste time or money remodeling. Not to mention they are quick when it comes to getting the paperwork together and most are willing to give you cash!