When real estate investors come to me for a hard money loan, they may or may not need to have a formal appraisal of their property. Appraisals in hard money are hit or miss — dependent on which lender the mortgage broker uses, 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:
Before I dive into the types of appraisals, I want to briefly discuss the five different types of hard money lenders. The hard money lending world is very small compared to the $8.6 trillion government-backed mortgage market. Hard money lenders fall into five groups:
Each of the lender types have different appraisal requirements for the loans they fund.
These lenders usually rely on mortgage brokers to provide a valuation for them to review. In states that don't require a lending license, they work directly with borrowers and do their own valuations by looking at comparable sales online and visiting the property.
Real estate investors with a lending business on the side tend to do their valuations internally, using real estate analytics tools.
Family Offices
Though every family office operates a little differently, I work with one 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 does a physical site inspection, meeting the borrower at the property to do a walkthrough and take photos.
Conduit lenders originate loans and sell to fixed-income investors in the secondary market. They nearly always require a full interior-exterior appraisal prior to closing.
Mortgage funds will do their own internal valuation, perform a site inspection, 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.
As a hard money borrower, knowing your options 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 allow 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 one-mile radius.
The best part about desktop reviews is they allow for a quicker closing over a full interior-exterior appraisal. The lender can check the photos from the online listing to see the condition of the property inside and out, and then run an 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.
Building on the desktop review is the site inspection. Some hard money lenders, like the family office I mentioned above, are required by the 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 send a fund partner to meet the borrower at the property for a site inspection.
Full interior-exterior appraisals can have a one-day turn around in times when I need a rush order. Or, they can take as long as one to two 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 provide these loans 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 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 input of a local real estate agent can be invaluable to the hard money lender.
Conclusion
Hard money loan appraisal requirements vary depending on the lender and how they are set up. Individual trust deed investors and real estate offices usually 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 at all to a full appraisal that could take a month or two if you have a commercial property. If speed-to-closing is essential, 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.
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