Hard money lending is private lending based on the strength of the borrower’s assets rather than their income and credit. In every case, the lender requires the borrower to offer some sort of asset as collateral. That asset may or may not be appraised before loan approval is given.

Actium Partners, a bridge loan and hard money lender based in Salt Lake City, Utah, says that appraisals are fairly common in their industry. However, private lenders have enough flexibility to do as they see fit. Sometimes they appraise. Other times they do not.

Real estate transactions offer a good way of illustrating the difference between getting an appraisal and forgoing one. It doesn’t hurt that the vast majority of hard money and bridge loans made by companies like Actium Partners go to fund real estate transactions.

Appraising the Property in Question

Nearly all hard money loans obtained to acquire commercial property are backed by the property in question. Actium once funded a loan obtained by an investor who was buying a multi-unit apartment complex in Utah. The property itself served as collateral on the loan.

It goes without saying that Actium had the property appraised before rendering a decision. This is normal. Hard money lenders appraise assets for one simple reason: those assets secure the loans being funded. They need to be worth enough for a lender to comfortably take on the risk involved in hard money lending.

The downside to appraising a borrower’s asset is time. In other words, it takes time to arrange for an appraisal. Once arranged, the lender and borrower need to wait for the appraisal to be completed. This can be difficult for borrowers on a tight schedule.

A lender might get around this particular issue by employing its own in-house appraisal team. Having an appraiser or two on staff gives the lender the flexibility to send someone out the very same day a loan application is received. There is no waiting for a third-party appraiser to find time in their schedule.

Forgoing the Appraisal

There are times when a hard money lender may decide that appraising a property isn’t in the best interests of getting a loan funded. Yet this doesn’t mean going in blind. Hard money lenders have another option in something known as a broker price opinion (BPO). A BPO from a reputable real estate professional can take the place of an appraisal when circumstances demand it.

A BPO is more or less a qualified opinion from a real estate professional. Based on their knowledge of the industry and asset in question, the real estate pro offers an opinion of the proposed asset’s value. Obviously, the lender needs to be able to trust the real estate professional to make this arrangement work.

A BPO can prove quite valuable to a hard money lender without an in-house appraisal staff. It can be had much more quickly and less expensively. But there is a risk: over- or undervaluing the property by a wide margin.

Why It Matters

To you and me, whether a hard money lender appraises properties or not is a non-issue. But it matters to lenders a great deal. Hard money lending is riskier by nature. Lenders assume more risk by basing their decisions solely on asset strength. And because they tend to offer such sizable loans, they risk losing more if a loan goes south.

Property appraisals are a tool that hard money lenders use to protect themselves. But not every hard money loan is subject to appraisal. Lenders have the ability to flex as needed.