Appraisals - What Every Private Lender Should Know
Appraisals for private money loan differ from regular assessments. Many investors have become accustomed to relying only on an appraiser to assess the loan value. Most bank transactions are like this because the loan officer or banker does not have the time or knowledge to analyze all collateral types.
Hard money and private loans are not the same. If you are investing in a private money loan, the best way to protect yourself is to determine the value. You don't have to be a professional appraiser to determine value. However, you must know what tools to use and the proper method for determining value.
Different forms of collateral necessitate different evaluation methods; however, here are a few pointers to help hard money / private money investors perform due diligence on the collateral's worth.
Valuation Pointers
Obtain several points of value rather than relying on a single valuation estimate. Below are some examples of the different types of estimates:
Appraisals
A professional appraiser's valuation report provides information on properties that have been sold, are pending purchase, and comparable active properties. It also includes images of the property and similar properties and property data analysis supporting the valuation opinion. An appraisal may range from 5-to 70 pages in length based on the type of property and form type required.
Broker Price Opinion (BPO)
A Broker Price Opinion is the value estimate of a real estate broker. This type of value opinion is generally a significantly smaller report than an appraisal. Broker price opinion reports are usually only a couple of pages long. Be wary of BPOs because the valuation report is as good as the real estate broker you choose. Be diligent in the professionals you work with and ensure they are trusted sources. Make sure that you directly choose the broker to inspect the property and that they photograph the property. Too often, brokers become very busy, and they may send an assistant or associate to view the potential property, which contradicts the point of having an opinion.
Appraisal Review
After you get an appraisal, you may get an additional appraiser review for the original appraisal.
Drive-By Appraisals
A drive-by appraisal, also referred to as driving the comps, is usually performed once you've established a few different points of value. First, drive by some of the comparable properties that have been sold, are pending, or are currently on the market to help you evaluate the property's value. You may also consider stopping to talk to other agents, property managers, homeowners, renters, neighbors, or adjoining property owners. Conversations with those familiar with the property or kind of property can sometimes yield the most relevant information.
To read more articles on the private lending industry check out Liquid Logics Blog.
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