Appraisals are like the backbone of the lending process, which is why conventional banks and traditional commercial real estate lenders require it. They involve a thorough evaluation process that provides the lender with valuable information regarding a property, including its market value and condition.
Appraisals help hard money lenders in determining the loan-to-value ratio, which will ensure that they set fair terms and conditions. If appraisals are so critical, why do some money lenders in commercial estate require them and some don’t? Keep reading to learn the reasons why.
Reasons Why Some Commercial Hard Money Lenders Require Appraisals
Getting a loan from a commercial hard money lender in commercial real estate has several benefits, especially flexibility and swift approval processes. Most hard lenders in commercial real estate often focus more on the total value of the property itself rather than your creditworthiness. This is why they can offer loans that banks or conventional lenders will decline due to your inability to meet certain requirements like credit scores.
Furthermore, some lenders require appraisals to understand the total value of the property you are using as collateral. This will help them ensure that your property’s actual value aligns with the loan amount you are requesting. Appraisals are also a form of risk mitigation for lenders. If you default on the loan, they can take control of the property or sell it off to recoup their outstanding money.
However, hard money lenders’ equity-driven nature can be quite advantageous for you. Since sometimes they are willing to provide higher loan amounts based on the commercial property’s potential. This is highly beneficial for commercial flippers as the higher loan amounts enable you to take on larger projects, which could yield higher profits.
Reasons Why Some Commercial Lenders Don’t Require Appraisals
Some commercial lenders may not require appraisals because they have alternative methods of assessing the property’s value. One of the alternative methods hard lenders use is a broker price opinion (BPO). A BPO is a real estate professional’s opinion on the estimated value of a property and how much it can sell for under current market conditions.
Commercial real estate professionals conduct a BPO in two ways: internal and external. An internal BPO involves the professional or broker evaluating the interior and exterior of the property and verifying minute details like the square footage and damages. While an external BPO, also called a drive-by BPO, involves the broker assessing the property only from the exterior. You should note that not all states allow the use of BPO.
Commercial lenders may also use a hybrid appraisal that combines an inexpensive desktop appraisal and a site inspection or a restricted appraisal. Commercial lenders rely on their own internal evaluation processes and market research to determine a property’s worth, allowing them to streamline the lending process. Regardless of the alternative a hard lender requires, they are always less time-consuming compared to thoroughly done appraisals that can take up to 2 weeks or more.
Non-Requirements for Hard Money Lenders
Appraisals are always required for several types of real estate loans due to the insight they offer. Some hard money lenders require appraisals as conventional lenders do due to their flexible lending criteria and risk mitigation strategies, while others focus on equity. Besides appraisals, other conventional lending requirements you can avoid by getting financing from hard money lenders include:
Credit History
You do not need to have an excellent credit score to apply for hard money loans. Unlike conventional lenders or banks that focus on your income and credit history, hard money lenders mostly care about the property’s value. The lenders focus on the equity value of the property value, knowing that if you default, they can take control and recoup the outstanding you owe. So, if you have a credit score below 600, you can still apply for a loan and get approval with hard money lenders.
Paperwork
Traditional lenders and banks request a lot of financial paperwork, which can be tiresome and time-consuming. With just a little information regarding your finances and the property, commercial real estate hard money lenders will start the lending process. Some may request just a desktop appraisal which takes about one or two days compared to a full appraisal. Commercial real estate investing with hard money lenders is an expedited and easy process.
Tax Returns
Conventional lenders want to ensure that you have a stable income or know if your earnings fluctuate, so they request your tax returns. It will provide them with a complete picture of your finances as it provides insights into your deductions and expenses. Hard money lenders understand that not every commercial real estate investor has tax returns that show a proper income flow. That is why they offer a lot of flexibility regarding the lending process.
How to Get Faster Commercial Real Estate Loans
Commercial real estate loan requirements vary for each hard money lender, some more time-consuming than others. Everyone knows that in the real estate industry, accurate/perfect timing is money. To build a profitable portfolio, you need to be a step ahead of other buyers and competition. So, if you want to secure your loan quickly and build your property portfolio, here are a few tips to utilize;
Build a Relationship with Realtors
Fostering valuable friendships/ relationships is the foundation of our business. Your network is your net worth, which is why you should develop trusting relationships with realtors. Start by letting your local realtors know that you are interested in purchasing commercial properties.
Most realtors tend to get information about a property before it is listed, so having a mutually beneficial relationship is valuable. The realtors can link you up with sellers when the opportunities arrive before other investors learn about them. While you can secure adequate funding to close the deal, it’s a win-win situation.
Considering your relationship with the realtors, they may also offer to help you estimate the value of forthcoming properties. They can also provide insightful tips on the best improvements and how much income can be gained from the property. A strong relationship with your local realtors can help grow your real estate portfolio.
Nurture a Relationship with Lenders
Commercial real estate investing can be quite risky, but having the best lending partner can make it highly profitable. Developing a strong relationship with conventional banks has its perks, but it wouldn’t be able to meet your needs at all times. Find you a private or hard money lender that you can trust and build a beneficial relationship with.
Hard money lenders are best when it comes to securing enough funding for time-sensitive projects. Their lending processes are quick as they require less paperwork. However, there are several hard money lenders in the market, and some are actual scams and rip-offs. So, how can you find one you can nurture a trusting relationship with? Here are five things to consider when choosing a hard money lender to partner with:
- Look for a lender that has a deep understanding of your local real estate market.
- Read reviews about the lender online and check for referrals.
- Ensure that the lender you consider offers a loan-to-value ratio that meets your investment needs.
- Compare their approval and funding speed to the type of time frame you need for your projects.
- Ensure that the lender’s fees including closing costs, prepayment penalties, and loan origination fees are ones you are comfortable with.
Hard money lenders are significant players in the real estate market. Building a relationship with the right and best hard money lender will save you time when the right investment opportunity comes your way.
Get Hard Money Commercial Loans with Capital Max
Capital Max is a firm that supports hard money lending and offers creative financing solutions. We have extensive experience when it comes to commercial real estate investments and providing hard money loans. We can help you get a loan solely based on the value of your property despite your inability to meet specific criteria.
We understand how time-sensitive some investment projects can be, which is why we offer a fast-close loan approval process. If you have any questions regarding our lending process or fees or would love to apply for a loan, contact our team at Capital Max.