As a real estate investor, its critical that you have a pretty good idea what a bank will appraise a property for once its 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 you’re strategy is to fix and flip then the end buyer is only going to be able to get a loan based of the appraisal. The appraisal by the hard money lender may have come in at $140k. However, if the appraisal from the buyers 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, its 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 its better to be forearmed 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.

Calculating Cash out of Pocket on an Investment Deal

March 24, 2011

So you’ve found a deal that you think you like.  Now, you want to know how much cash you need to have to execute your strategy. The short and simple answer is to visit our site and use the online calculators. (Flip Calc | Rental Calc) The longer answer is that its going to depend […]

Read the full article →

Private Lenders – It’s Not About ROI it’s About ROM

March 16, 2011

I was speaking with an investor about becoming a private lender when the question came up about diversifying risk and how they can ensure getting back their principal investment… Protecting yourself from loss – Warren Buffet says,”don’t talk about the return on my money until you talk about the return of my money (ROM).” This […]

Read the full article →

Radio Show – Critical Things to Look for in a Hard Money Lender

February 14, 2011

Radio Show – Critical Things to Look for in a Hard Money Lender

Read the full article →