How To Value Hard Money Lending Properties Like A Pro
You can never say you are among the most successful hard money lenders unless you know exactly how to value the property.
Check the four procedures of a hard money lending deal:
For sure, when a deal is so enticing, hard money lenders just can’t wait to move on to the fun part of rehabilitation and start imagine what the renovated property looks like after all the renovations are done! However don’t ever lose the chance to profit yourself maximally by properly estimating the real value of the property. It’s boring, somehow, yet important and strategic.
To tackle the mission, remember these C-suites keywords– comparable, cheapest and conditional.
Comparable: find three comparable hard money lending properties which are recently sold
Only those properties of similar configurations help you price your equities properly. Then how to define “comparable”? Same location, same number of bedrooms/bathrooms and same square footage.
Don’t miss the trivial features which set equities apart, i.e., construction years, building materials and indoor decorations. You may not find three counterparts which are exactly “same”, but the more similar, the better. The three comparable properties will give you an idea of how much your property should be priced at. For your reference, do not pick those properties which are still on the market for sale. These for-sale prices may sometimes mislead your quotations as you never know if the investors can fetch the same price at the end of the deal.
Cheapest: lower your expectation can lift your profits through a hard money lending deal
Don’t be too optimizing or you will be disappointed eventually. Staying conservative at the beginning will make you aggressive in the market gradually. That’s to say, forget about the two more expensive ones and choose the cheapest quotation.
To explain it more explicitly, let’s take an example. Now you have three comps in your local areas, $500k, $550k and $600k, distinctively. If you use the average price, you may end with obtaining no profits. Instead, if you choose the cheapest price, you may get an unexpected premium, more than the difference of $50k.
Conditional: exclude those value-deducting conditions
In short, research more before you finally settle your price. A single change of condition may directly influence the whole market value of your property. It sounds unbelievable, but things do happen, for example your house value may double if the property is located just across the street.
Pay attention to the following issues which will deduct the value of your property harshly:
- High crime rate
- Property location near commercial areas
- Railroad tracks
- Neighborhood congested with rentals
Remember these C-suite adjectives, next time when you evaluate the value of properties, you are good enough to be your own Pro.
Benjamin Donel, CEO