Be Careful About Hard Money Loans with No Appraisal
Searching for hard money loans online is as easy as bringing up your favorite search engine and typing in the right terms. Do so and you are bound to see at least one or two lenders offering hard money loans with no appraisal. While such lenders are not the norm, they do exist. Be cautious about doing business with them.
As private lenders subject to fewer rules and regulations, hard money lenders are free to operate their businesses as they see fit. This suggests that a hard money lender could approve a loan based solely on the borrower’s promise to repay. But does that make good business sense? No, especially if you are doling out loans worth hundreds of thousands of dollars.
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Hard Money Is Asset-Based
What makes hard money lending unique is the fact that it is asset-based. In other words, Salt Lake City’s Actium Partners doesn’t make a point of delving into every little financial detail of a borrower’s life. They do not need to see profit/loss statements or balance sheets. They don’t assign a whole lot of weight to credit score. They are interested mostly in the value of the collateral being offered as backing for the loan.
Imagine you approached Actium Partners in hopes of borrowing $100,000 to obtain a piece of property priced at $200,000. You are asking for 50%. That is right in line with the firm’s LTV. But what if the property is severely overpriced? What if it is really only worth $150,000? Now you have a problem.
The value of your asset has to be greater than the amount you want to borrow PLUS the amount the lender would expect to spend on foreclosure and sale in the event of default. If the value is not there, the loan will most likely be denied.
Appraisals Tell the Story
Hard money’s asset-based nature is what makes appraisals so important to the process. It is the appraisal that tells a lender how much a proposed collateral asset is worth. Without an appraisal, the lender is left to guess. Hard money lenders willing to operate on guesses are taking significant risks. A small number are willing to do that, but most are not.
It is also important to note that sometimes hard money lenders play semantic games. They offer hard money loans with no appraisal, but their definition of appraisal differs from yours. You define appraisal as any kind of valuation. Their definition involves a valuation conducted by a disinterested third-party based on a set of formal criteria and resulting in an official document being drawn up.
Some hard money lenders do not go to that extent. Rather, they have people on their staff who are highly experienced in valuing properties. These are people who may have a background in real estate or finance. Either way, they are not licensed appraisers. They are lender employees whose main job is to value assets.
This type of scenario allows a hard money lender to claim no appraisal is necessary while at the same time still valuing the asset before making an approval decision. The difference is semantic only. Your asset still has to have a high enough value to cover the loan you’re applying for.
Conduct Your Own Due Diligence
Hard money lenders conduct their due diligence before approving loan applications. As a borrower, you should do the same. Research hard money lenders before you start applying. Understand what their application requirements are. And if they offer hard money loans with no appraisal, be sure you know what that means before you sign on the dotted line.