While appraisals are not legally required for hard money loans, many lenders will want one. Learn more about how appraisals work for hard money loans.

For many types of real estate loans, an appraisal is a legal requirement, such as in the case of conventional mortgages or mortgages backed by a government agency like the Federal Housing Administration (FHA). Hard money lenders are not subject to any laws or regulations that make appraisals mandatory, but contrary to several popular online articles, they often still require an appraisal as a matter of their personal policy.

The question is: what kind of appraisal they will require and how in-depth will it be? This article addresses the types of appraisals that may be necessary for a hard money loan.

Are appraisals required for hard money loans?

Hard money loans are not subject to the laws and regulations that govern residential mortgages and many types of commercial loans. Residential mortgages must include comprehensive appraisals conducted by licensed appraisers. The Texas Appraiser Licensing & Certification Board (TALCB) handles appraiser licenses in this state. Conventional mortgages must conform to standards set by Fannie Mae and Freddie Mac, while mortgages backed by the FHA and other federal agencies have separate regulations.

Appraisals serve several important purposes. One of their main functions is to ensure that a property meets a lender’s requirements for loan-to-value ratio (LTV). This is also why many hard money lenders require appraisals, even if it is not legally mandatory.

Hard money lenders tend not to focus as much on factors like a borrower’s credit history or debt-to-income ratio (DTI). Instead, they look at the property’s after-repair value (ARV). This is a property’s projected value once a borrower has completed all of their planned improvements, repairs, or renovations. To estimate a property’s ARV, one must know its current value. An appraisal is often the best way to determine that amount.

Other factors that may affect whether a hard money lender will want an appraisal include the following:

Lender policies: A lender might require appraisals for all loans, or only for some.
Loan amount: The larger the loan, the greater the lender’s risk. An appraisal can be an important tool in risk mitigation, so hard money lenders could be more likely to insist on an appraisal for higher-value loans.
Property type: The larger or more complex a property, the more likely a hard money lender might be to want an appraisal. Multifamily and other commercial properties, for example, present different issues for lenders than single-family residential properties.
Borrower’s financial situation: While we said that hard money lenders tend not to place much emphasis on factors like credit history or DTI, that doesn’t mean they never consider it. If a borrower has a strong investment plan but bad credit, or if they are a new investor with no track record of repaying loans, a hard money lender might want to see an appraisal.

What are the different levels of appraisals?

While many lenders must rely on complete appraisals, hard money lenders have more options when it comes to obtaining a property appraisal. Some hard money lenders seek out fairly cursory appraisals that only give them a small amount of information. Others prefer a very thorough appraisal process. While this might sound intimidating, it can benefit real estate investors by giving them more information about the property.

Desktop appraisal

A desktop appraisal is the simplest and fastest type of appraisal. It also tends to be the least expensive. Repeat borrowers with an established relationship with a lender are more likely to get approved based on a desktop appraisal alone.

Desktop appraisals estimate the property’s value based on publicly available records such as tax records, MLS listings, and public listing platforms. The name “desktop” comes from the fact that all of the work can be performed from a computer.

A lender may choose to perform an appraisal on their own using public information. This is more commonly known as a “desktop review.” A TALCB-licensed appraiser might have access to more resources, allowing them to perform a more thorough desktop appraisal.

Site review

This type of appraisal involves a physical inspection of the property. A “hybrid appraisal” combines a desktop appraisal with a site inspection. As with desktop review, a lender may conduct their own review, or they may have a licensed appraiser do the work.

Broker price opinion (BPO)

Real estate brokers with licenses from the Texas Real Estate Commission (TREC) may perform a type of appraisal known as a broker price opinion (BPO). This process typically involves using recent sales prices of comparable properties to determine a value. Real estate agents often obtain BPOs to determine listing prices for properties. Hard money lenders can also use BPOs as part of the loan application process.

Complete appraisal

A complete appraisal involves a rather extensive process conducted by a licensed appraiser. The appraiser must inspect the interior and exterior of the property, note all improvements to the property, and research comparable properties in the area. The final appraisal report must include:

Photographs of the property and any comparable properties that the appraiser reviewed
A sketch of the building or home exterior
A map showing the property’s location in relation to the comparable properties
An explanation of the appraiser’s methods in determining the appraised value.

How much do appraisals cost?

A desktop appraisal by a licensed appraiser will almost certainly cost less than a complete appraisal of the same property. It could even be baked into your origination fee and not even listed as a line item cost.
A BPO by a licensed real estate broker could cost as little as $50 to $100.
A complete appraisal by a licensed appraiser may cost around $500 for a complete appraisal of a single-family residence. That number can vary widely depending on the location and size of the property.

The cost of an appraisal can vary greatly depending on the size of the property and the type of appraisal. Licensed appraisers charge more for their services. The borrower typically pays for the appraisal.

Learn more about hard money loans with Capstone Capital Partners

In most cases, we use a BPO to determine a property’s value. On loans larger than $1 million, we may want two independent values. This means we’ll use two separate appraisals from unrelated sources, such as BPOs from brokers at two unaffiliated companies. Appraisals protect both us and our borrowers from higher prices. We want everyone to win, and appraisals are part of good due diligence with a reputable lender.

With an appraisal in hand, our borrowers close in just seven days! Our decades of experience and $500M+ in closed loans over our combined careers add up to success for our borrowers, time after time. Let’s take a look at your project today. Get started on your pre-approval (with no upfront costs, as always)!

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Actually, Appraisals are Required for Hard Money Loans