As a real estate investor, it’s critical that you have a pretty good idea what a bank will appraise a property for once it has been rehabbed. A poor or aggressive appraisal by a hard money lender may seem attractive when you’re purchasing, but many times it will come back to bite you.
If your strategy is to fix and flip, then the end buyer is only going to be able to get a loan based on the appraisal. The appraisal by the hard money lender may have come in at $140k. However, if the appraisal from the buyer’s lender only comes in at $120k, that’s what their loan amount will be decided by. The price you can sell any property for is determined by what someone is willing AND ABLE to pay. Unless the buyer in this scenario has an extra $20k sitting around, then you’re deal may be dead.
Over-leveraging with hard money, when your strategy is buy and rent, can be an even greater pitfall. Imagine this: You’ve factored in your out-of-pocket expenses. You’ve gotten the hard money loan and performed the rehab. Then, you go to refinance and the bank tells you that the property appraised for $20k less than you had calculated. This can be a gut wrenching experience. Using the numbers from the above flip scenario, you would be looking at making up a $20k difference.
When looking for a hard money lender, it’s important to partner with someone who’s going to work with realistic numbers on any given deal. A good hard money lender is going to work hard to paint the most accurate picture possible when it comes to your appraisal. My theory is that it’s better to be forewarned and able to make prudent investment decisions. Ignorance is never bliss when it comes to real estate investing.
Ever had an experience where the hard money lender’s appraisal came back to bite you? Let us know below.