The Investors Guide to Private Lending Appraisals

All of the tools mentioned above can be useful resources for private lenders. But many factors can impact a property’s value that you will not find in an appraisal or BPO.

Even when physical defects are picked up by Appraisers, the Appraiser’s adjustment to the value is effectively their best guess based on their experience.

For example, an appraiser might notice that the roof may need a repair, and so they adjust their valuation accordingly. On closer inspection by your contractor, it appears the entire roof needs replacing.

That kind of oversight can turn a project upside down financially, or make the property unmarketable.

That is why a detailed scope of work from a qualified contractor is an essential part of the mix when it comes to your valuation process.

I currently have over 100 rental properties in my portfolio. Here are some of the major value influencers I look for when I’m buying:

Location Location Location

This is one I learned the hard way.

I buy houses in some tough neighbourhoods. We aim to clean them up, and help working families to own them on our rent-to-buy program.

In these neighbourhoods, location is an especially important factor. Buy on the wrong street, or even the wrong part of a street, and you could end up with an unmarketable, unrentable mess.

As a Lender, you need to feel confident that your Borrower knows their onions.

Do they know this market? have they bought and sold here with some success already? Do they have a proven track record of picking the right houses for their business model?

Again, having confidence in your Borrower is fundamental to success in the private lending game.

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Parking

This can be another big one. In urban neighbourhoods, everybody drives. So a lack of parking can have a disproportionate impact on the value of a home.

The same goes for commercial property. Many older properties were built at a time when many people used public transport to get to and from work. An office building without enough parking

Access

I bought a house on a private street with access issues. It was a nightmare.

The local authority did not maintain the access route and it was left to fall into disrepair. In the end I fixed it up myself (at significant cost) in order to be able to sell the house.

If the house is located on a private street, make sure there is a maintenance agreement between owners.

Permits

If there is unfinished construction work, the permits may need renewing or updating.

I have seen building inspectors require entire structures be torn down and the work started from scratch. This would likely push the project way over budget, and risk default and foreclosure for the Lender.

Land

When buying land, easements can be a big issue. I came across some land issues when I invested in a farm in Oregon.

There were easements for maintenance and repair access for City water running under the property, and power lines running above. Fortunately, we were aware of these issues in advance, and valued the land accordingly.

From a Lender’s perspective, easements can make the property difficult to liquidate or develop, so be careful.

Also, if you are lending against a lot that your Borrower intend to build on, make 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

I have bought some weird houses before. In most of those cases the ‘weirdness’ was where the value-add opportunity was.

Moving key rooms such as the kitchen, adding an extra bathroom, or pulling down walls to open a space up. These are all are good examples of taking a property with layout issues and turning them to your advantage.

All that said, If you are lending against a house that is impractical beyond reparation, it could be rendered unmarketable, even after rehab. Make sure your Borrower knows what to buy and what not to buy. Again, check their track record!

Rental Income

Figuring out accurate market rents is important if you are lending against a rental property. You can use them to establish the debt service coverage ratio (DSCR) – a key metric in risk assessment.

Make sure that the projected rents are accurate. Research current rental listings of similar houses in the area, and/or speak to leasing agents or get a Rentometer Pro report.

You want to be sure that the property generate sufficient income to cover your loan payments AND a cash flow profit for the Borrower.

Vacancy Factor

Alongside and accurate rental projections, you want to understand vacancy rates when lensing against rentals.

Will the property take a long time to lease? A lack of income from a long-term vacancy could result in a default by your Borrower.

Again, I pull this information together from various sources. I already know my own markets, but if I am lending to another investor in a new market I will research online listings, and speak to local leasing agents

Accurate Monthly Expenses

Has your Borrower estimated their ongoing holding costs accurately?

These include property taxes, insurance, property management and ongoing maintenance. A miscalculation or omission here could drastically alter the DSCR and turn a good investment into a risky one.

This list is not exhaustive. There are a ton of issues that impact property values. I have been in the game for ten years and I still uncover new ones all the time. As a private lender, much of this work should already have been done by your Borrower. I cannot stress enough the importance of buying into the Borrower, their track record and capability as much as you buy into the real estate.

Pro Tip: Get fully-vetted private lending deals in your inbox every Thursday

My Own Private Lending Appraisal Method