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Hard Money Lender Appraisals

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Many investors are accustomed to using an appraiser as the sole determiner of value of a loan. In most bank transactions, that is the case because the banker or loan officer lacks the time and expertise to evaluate all forms of collateral.Private Money Loans, or hard money loans as they are sometimes referred to, are different. If you are investing in a private money loan, the best form of protection you have is to make the determination of value yourself.   You don’t have to be an appraisal whiz-kid to figure out what property is worth.  You do have to know the tools to use and the best way to make a value determination.

Different types of collateral will require different appraisal methods, but the following are tips for private money / hard money investors to conduct due diligence on the value of the collateral.

Multiple Points of Value

Get multiple points of value and do not rely on just one value estimate. Here are a few different types of values:


A value opinion report provided by a licensed appraiser.  It provides information on sold, pending and active comparable properties, photographs of the subject and comparable properties,  analysis of property data to support the opinion of value and can be 5-70 pages long depending on the property and form type requested .

Broker Price Opinion (BPO)

BPRO is a real estate broker’s assessment of value.   This is  a much shorter  report than an appraisal, usually only one or two pages long.   Be careful with BPOs because the value you receive is only as good as the broker making the assessment.   Be sure you personally select the broker to review the property and make sure that the broker is the person who photographs the property.  Too many times, brokers get busy and send an assistant to look at properties which defeats the purpose of having the opinion.

Appraisal Review

Once you have an appraisal, you can request and pay for another appraiser to review the appraisal you obtained.

Personal Drive By

Often this is called “driving the comps.”  This is best done once you have a few points of value.  Drive a few of the sold comps (sold comparable properties), some pending comps and some active comps and make an assessment yourself of what you believe the property is worth.  Stop along with the way and speak with other brokers, other owners, property managers, tenants, and neighbors or neighboring property owners.   Sometimes the most valuable information is obtained from having  conversations with others familiar with your property or type of property.


Beware of negative features which can dramatically affect value.   The negative features will vary based on the type of collateral.  Too often appraisers will deduct their best dollar value guess to compensate for the negative, but the reality is the negative feature may make your property unmarketable or significantly lower in value than anticipated.

Here are just some negative factors to give you an idea of the impact this can have:

Location – They say real estate is about location, location, location and it is true indeed.  Consider the value of a home in a nice urban neighborhood close to shopping vs. the same home which abuts to an oil change shop.   Even though the homes may be on the same street, it is likely the one which is adjacent to the oil change shop will attract far fewer buyers (other than perhaps the manager of the oil change shop).   Less extreme location examples may have similar impact, such as a property which backs up to a noisy athletic field, or at the corner of a busy street.

Access – Consider a commercial property that is located among residential structures.  Check with the local authority that issues business licenses if a license would be granted to a business requiring  frequent large (semi) truck deliveries.  This could limit your potential pool of lesees.

Properties on private streets can have access issues due to no city or county road maintenance.    Areas with large snowfall should have private maintenance agreements between property owners on the street or contracts with third parties to provide the service.

Parking – For commercial loans, parking can substantially reduce the value of a property.    Consider a building which has 4 spaces per thousand to a building which has the same 4 spaces per thousand, but 50% of those spaces are tandem spaces in which one party is locked in the space until the car behind it is moved.

Permits – Be careful of partially completed construction projects which may require new or updated permits.  In some cases, inspectors have been known to require entire buildings to be dismantled because materials have aged, or codes have changed.

Environmental – Be wary of properties that have not had a Phase I, or if required, a Phase II environmental study to determine past uses of the property.  Residential properties should be tested for mold, radon, and meth.

Land – Look out for land that is “locked” or does not have property easements.     Be sure the land has access to sewer, water, and utility hook-ups, or is able to have a septic system installed if a municipal hookup isn’t available.

Floor Plan/Functionality – Whatever the property type, the layout should be practical for the intended or best use.  For example, “chopped up” floor space in a commercial building (lots of small offices) that would require extensive remodeling to “open up” could be a real problem when all of the surrounding businesses are retailers and the location would probably attract a retail business tenant, if it wasn’t for the incompatible floor plan.


Look for trends in the property type upon which you are lending.  Are values stagnant, going up, or going down?  Are there a lot of for sale or for lease signs on similar properties in similar areas ? If so, why ?

Since most rental property value is determined as a multiple of net operating income , it is critical to make sure the income projections are realistic.  Talk with other tenants and find out what they are paying and that their lease terms are.

Send the tenant(s) an estoppel certificate   to verify the current rent being paid.

Vacancy Factor
Look at similar properties and determine if the vacancy factor used in the financial analysis is accurate. What is the vacancy factor of similar properties in the area? What is the trend in vacancies?


Verify that the expenses for the property are realistic, and that a reasonable increase in those costs is assumed in the future.

Capital Expenditures

Be sure appropriate reserves for capital expenditures is set aside for financial assumptions.  Capital expenditures will vary by property type.  For residential rental property, these may include appliances, carpet and roofs, but for industrial office buildings, it would include items such as heating and air conditioning, and tenant improvements.

Future Zoning Changes / Area Developments

Check with the local zoning and planning office to find out about possible future changes that have been approved or are currently being proposed.  Possible zoning changes or future developments in the immediate area could make a positive or negative effect on value, but would probably never be taken into consideration in a typical appraisal because it is not included in the scope of work an appraiser performs.    A large shopping / residential area currently seeking approval with the local planning commission may have a large impact on this property’s value 3 years from now.

It’s also a good idea to check with the state Department of Transportation to see if there are any major roadway changes planned.    If you expect to be invested in this property long term, and one of its prime attributes is interstate access, it will be important to know that a major interchange re-work is planned in 5 years and the interstate on/off ramps are slated for relocation.

Value is best determined by multiple points because there is more data from different sources, including yourself, to help you determine if the property on which you are loaning is worth the value you think it is worth.   High impact information may never come to your attention through the normal valuation report processes typically used.   There is no substitute for research outside of these reports that reveals current or future circumstances that can dramatically affect your investment.

Sometimes, the best loans are the ones you do not make because you were not comfortable with the value.

Martin Coyne

Martin Coyne

Martin Coyne is the Chief Technology Officer at Connected Investors. He is an experienced technology executive and entrepreneur specializing in identifying disruptive technologies and helping bring them to market. He created and launched the largest online funding marketplace, CiX, connecting Asset-based Lenders and Real Estate Investors.

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