When most people think of hard money lenders, including real estate agents, conventional mortgage brokers, escrow...
Hard Money Loan Appraisal Requirements
When real estate investors come to me for a hard money loan, they may or may not need to have a formal appraisal on their property. Appraisals in hard money are hit and miss, dependent on which lender the mortgage broker places the loan with, how that lender is structured, and what the lender requires for a valuation prior to funding the loan.
This blog post will cover the different types of hard money loan appraisal requirements, including:
- Desktop Review
- Site Inspection / No Formal Appraisal Report
- Appraisal / Broker Price Opinion
Different Types of Hard Money Lenders
Before I dive into the types of appraisals, I want to briefly discuss the five different types of hard money lenders, which I recently wrote about in another blog post. The hard money lending world is very small compared to the $8.6 trillion government backed mortgage market. Hard money lenders are split between the following five groups:
- Individual Trust Deed Investors
- Real Investors Lending Money
- Family Offices
- Conduit Lenders
- Mortgage Funds
Each of the different types of lenders have different appraisal requirements for the loans they fund.
Individual Trust Deed Investors
These lenders usually rely on mortgage brokers to provide either a valuation for them to review or they work directly with borrowers in states that don’t require a lending license and do their own valuations by looking at comparable sales online and visiting the property.
Real Estate Investors Lending Money
Real estate investors with a lending business on the side tend to do their internal valuations, having a few different real estate analytics subscriptions at their disposal.
I work with a family office that uses a line of credit secured by several investment properties that have been in the family for decades. The bank providing the credit facility requires that one of the family members do a physical site inspection, meeting the borrower at the property for a walkthrough and to take photos.
Conduit lenders originate loans and sell to fixed income investors in the secondary market. They nearly always require a full interior and exterior appraisal to be completed prior to closing.
Mortgage funds will always do their own internal valuation, do a site inspection, may order a full appraisal, or some combination of the three. Each mortgage fund is different based on the covenants in their Private Placement Memorandum with fund investors and/or credit facilities they may have.
Why it matters to you as a hard money borrower is because it will give you a better understanding of the timeline for closing your hard money loan. Without a formal interior-exterior appraisal, the faster, in theory, your loan can close.
Let’s dive into the appraisal types:
Desktop reviews are used by several of the lender types above. In fact, most every lender will do a quick online review on Zillow or Redfin to see if it’s worth diving deeper into the due diligence for the loan. Other lenders have a subscription to a valuation service like House Canary or CoreLogic, which allows the lender to sort through the characteristics and details of the property along with the comparable properties in a defined area. I use House Canary to zero in on a property or expand my search if comps aren’t as easy to find within a 1-mile radius.
The best part about desktop reviews are they allow for a quicker closing over a full interior-exterior appraisal. If a property is listed for sale, the lender can check the photos from the online listing to see the condition of the property inside and out then do their analysis using their subscription service. This process takes anywhere from 15-45 minutes, depending on the number of comparable sales in the area. The more comps the faster the process.
Site Inspection / No Formal Appraisal Report
Building on the desktop review is the site inspection. Some hard money lenders, like the family office I mentioned above, are required by their bank providing the credit facility to walk and take photos of every property they make a loan against. This means they’ll catch a quick flight early in the morning from Los Angeles to San Francisco, meet the borrower at the property, or properties in the case of a cross-collateralized blanket loan, before catching an early afternoon flight home.
I work with a few mortgage funds that internally value the property and one of the partners in the fund meet the borrower at the property for a site inspection.
Appraisal / Broker Price Opinion
Full interior-exterior appraisals can have a 1-day turn around in times when I need a rush order. Or, they can take as long as 1-2 months in the event of a commercial property appraisal in the 2020 to mid-2022 real estate market. Conduit lenders, like fix and flip lenders, almost always require a full interior-exterior appraisal because the investors who they are selling the loans to in the secondary market require a full appraisal. Taking it one step further – the secondary market investor almost always has a credit line, or credit facility, from a big Wall Street bank, which requires an appraisal for every property securing the credit line. It can be layers upon layers of financing agreements when conduit lenders are involved.
Broker Price Opinions (BPOs) usually turn around within a few days and are completed by local real estate agents who know the market. I order BPOs through Clear Capital when we need it for a specific lender. The valuations aren’t as consistent as a full appraisal, but, when combined with analysis from House Canary, the remarks from a local real estate agent can be invaluable to the hard money lender.
Hard money loan appraisal requirements vary depending on who the lender will be and how they are set up. Individual trust deed investors and real estate offices will mostly do a desktop review while some family offices and mortgage funds will meet the borrower at the property for a site inspection. Conduit lenders require full appraisals as they’re selling the loans to secondary market investors who need to be compliant with their credit facilities.
For you as the borrower, you only need to know that appraisal requirements can go from none to a full appraisal that could take a month or two if you have a commercial property. If speed to closing is essential, then you’ll be placed with a lender who can forgo the full appraisal for a desktop review or site inspection to meet your fast approaching funding deadline.