Probably the most consistent concern borrowers, brokers and hard money lenders come across nowadays is determining value. Those days have endedwhen capital providers would fund project with loan amount that?s equal to ?a percentage of whatever the property appraises for.? Those days are sorely missed by many, but especially by borrowers that have no choice but to finance their properties and rely onthis lending model that many hard money loans are famous for in the past.
Valuation is especially relevant in terms of hard money loans (Private Money loans). Regardless of the lenders, many of them will unquestionably underwrite their loans with a considerable desires for quality of the real estate asset. Most are solely collateral-based meaning real estate value is the most crucial criteria which a lender takes into account when deciding to finance a property. Exactly how do hard money lenders evaluate a property in today?s marketplace?
Appraisals
Appraisals would be the most recognized method to obtain property valuation, and for hard money lenders, appraisals are simply opinions of value from licensed individuals. Now the more sophisticated fund managers look at the real value of a real estate asset which is the dollar amount somebody is willing and able to pay for the property. Nevertheless besides this appraisal, almost all hard money lenders would demand an appraisal to be done bya MIA licensed appraiser.
Tax Valuation
Sometimes capital providers use assessment and tax valuation as a benchmark for valuating property. In my view it is a bad approach even though the fund managers usually use it as initial valuation. The firstconcern is that tax valuations don?t necessarily occur annually and many counties that assess annually don?t always adjust the actual property value appreciation or value loss. They adjust it throughout the county with different set rate. Not to mention no proeprty owner will go to the county and ask them to increase the value of their property because they don?t would like to pay taxes.
Real Estate Broker Opinions
The Broker Price Opinion is the less expensive approach to determine the property value and basically lenders ask a a local expert?s advice. However, the problem with this technique is that real estate broker generally provide the best possible valuation or sale price and lenders are looking for quick sale price.
The Common-Sense & Income Approach Method
Lenders are starting think the way that hard money lenders used to be a while back. The actual hard money lenders are considering the probability of the potential borrower to repay their loan first. If the property is income producing property, is it enough to pay the monthly payments and is the borrower able to refinance and pay the loan off? Plus they need to know if they want to own the real estate if they foreclose on the borrower. They ask themselves if they would purchase the property for the amount they are financing. This is the simplified method that old timers used to do and many are looking at deals in this manner. At least it cuts through major hurdle and that?s collateral.
While there?s simple valuation method, you should understand that not all properties are valued exactly the same and lenders consider valuating each asset class differently. For instance, apartment buildings tend to be more favorable than single tenant retail center. And for most hard money lenders, each asset class has a specific leverage ratio.
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