Hard Money Borrowers:  You Need to Know the Difference!

The appraisal requirements of “hard money lenders” are one of the most important, but least understood, aspects of getting hard money (sometimes called private money or bridge loans).  If you are thinking of using private capital financing you must know how the lender is going to treat the appraisal of your property.  Failure to understand this could put you at a great disadvantage in your efforts to get your loan funded in a way that works for you.

Market Value Appraisals

Almost all traditional lenders (banks and life insurance companies) ask their appraisers for what is called a “market value” appraisal. Banks are forced by the Feds to follow the USPAP Standard for appraisals (USAP is the abbreviation for “Uniform Standards of Professional Appraisal Practice”.  The basic terms of this definition of market value require the following considerations:  (1) Buyer and seller are typically motivated; (2) Both parties are well informed or well advised, and acting in what they consider their own best interests: and (3) A reasonable time is allowed for exposure in the open market.

Quick Sale Value

Many hard money lenders put on their web site that they will go up to 65% (sometimes slightly higher) of “appraised value”.  However, all too often they do not mean the same thing by appraised value as a bank.  The hard money lender frequently means up to 65% of “quick sale value”.  Quick sale value means whatever the lender wants it to mean (unlike the banks which must follow USPAP standards).  Many hard money lenders want a value if the property is put on the market and must be “liquidated” in 90 days.  There is no formal definition of “quick sale value”.  However you can take it to the bank (pun intended) that quick sale value will be far lower than fair market value.

Let’s use the following example:  Borrower owns a warehouse valued by a bank appraiser using fair market value of $1,000,000. The Bank has a first mortgage loan on the warehouse of $650,000. For some reason bank wants to get the loan paid off quickly and Borrower goes to Mr. Hard Money Lender.  Mr. Hard Money tells Borrower that it will fund up to 65% of value but doesn’t tell Borrower that it will be “Quick Sale” value.  Then, Mr. Lender takes an up-front fee from Borrower of $5,000 to cover underwriting and appraisal costs.  To Borrowers dismay they find out (after making a non-refundable $5,000 up-front deposit to Lender) that the “quick sale value” is $500,000.  This is not enough to pay off the Bank!  Remember that quick sale value is pretty much whatever the Hard Money Lender and its appraiser think it is – no actual defined standards exist for this type of valuation.

The Borrower now has to either come up with an additional $150,000 in cash to close the loan with Lender or not get the loan, lose their non-refundable deposit, and even worse perhaps end up on bad terms with the bank by not getting the payoff funds they need.

What can the Borrower do to prevent this from happening to them?  Communicate with your Lender before giving them a deposit.  Ask specifically if their appraisal requirement is for the USPAP “fair market value” or if it is quick sale (sometimes called liquidation”) value?  Get it in writing.

Our Philosophy

If you are following Montegra’s advice from several of its previous blogs you will always use your own attorney to help negotiate your loan with a hard money lender.  This is the very best way you can protect yourself – not using an attorney is penny wise and pound foolish.

Montegra, throughout its 42 year history as a Colorado Hard Money Lender, has always used the “Fair Market Value” definition for its appraisals.  We also insist on all of our larger loans that Borrower must be represented by their own counsel.  We walk the walk.  Be sure to verify that your hard money lender does the same.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.