The following are recommendations for real estate investors to perform due diligence on the worth of the property. Different types of collateral will necessitate different assessment methodologies.

Multiple Value Viewpoints

Do not rely just on one value assessment; gather numerous points of value. Here are some examples of various value types:

Appraisals – a certified appraiser’s value opinion report. Can be 5-70 pages long, depending on the property and form type requested, and includes details on sold, pending, and active comparable properties, images of the subject and similar properties, and analysis of property data to support the judgment of value.

Collateral DNA (C-DNA) – a professional third-party market analysis that offers thorough information on property value utilizing a variety of parameters. You can learn the after-repair value before shelling out cash for a full appraisal by ordering one of these reports, which is less expensive than getting an appraisal. Hand Over Fist Funding, LLC recommends investors get a C-DNA on all their deals.

Broker Price Opinion (BPO) – Value estimation made by a real estate broker. In comparison to an evaluation, this report is substantially shorter, typically only being one or two pages long. Be cautious while using BPOs because the value you get depends on the broker who performs the evaluation. Make certain that you personally choose the broker to examine the property and that the broker is the one who takes photos of the property. Brokers frequently send an assistant to view properties because they are too busy, which negates the point of getting an opinion.

Appraisal Review – When you get an appraisal, you can ask for another appraiser to review it and pay for that service.

Personal Drive By – This is often referred to as “driving the comps.” The time to do this is when you have a few valuable points. Drive a few of the sold comparable properties, some of the pending comparable properties, and some of the active comparable properties to determine the value of the property for yourself. Take a break along the way to chat with other brokers, owners, managers, tenants, and other neighbors or property owners. Sometimes talking to others who are familiar with your property or its type will yield the most useful information.

Negatives that affect private money loan valuations

Beware of defects that have a negative impact on value. Depending on the collateral kind, the drawbacks will change. Too frequently, appraisers will subtract their best estimate of the financial worth to make up for the drawback, but in actuality, the drawback may render your property unmarketable or substantially less valuable than expected.

To give you a sense of the potential harm, consider just a few of the following:

Location – It’s true when they say that real estate is all about location, location, location. Comparing the value of a home in a great urban neighborhood near a store and the identical home next to an oil change shop is instructive. The home next to the oil change store will probably draw considerably fewer purchasers even though the houses are on the same street (other than perhaps the manager of the oil change shop). Less extreme instances of location influence include a home backing up to a noisy sporting field or being on the corner of a busy street.

Access – Think about a business property that is surrounded by houses. If a business requires frequent large (semi) truck deliveries, inquire with the local agency that issues business licenses about whether a license would be granted. This may reduce the number of potential lessees you have.

Private streets – may have access problems because there is no county or city road maintenance. Areas with heavy snowfall should have contracts with third parties to supply the service or private maintenance agreements between property owners on the street.

Parking – Parking can significantly lower the value of a property for commercial financing. Compare a building with 4 spots per 1,000 to one with the same number of spaces, but 50% of them are tandem spaces, in which one party is confined to the place until the vehicle in front of it is moved.

Permits – Watch out for building projects that aren’t quite finished because they might need new or revised permits. Because materials have deteriorated over time or because of changes in codes, inspectors have occasionally been known to order the demolition of entire structures.

Environmental – Be cautious of properties that have not undergone a Phase I or, if necessary, a Phase II environmental investigation to ascertain the property’s previous uses. Mold, radon, and meth should all be evaluated in residential buildings.

Land – Be mindful of land that is “locked” or lacking in property easements. Verify whether the property has access to sewage, water, and utility hookups or whether a septic system can be installed if a municipal hookup is not available.

Floor Plan/Functionality – The layout should be functional for the intended or best purpose, regardless of the type of property. In a commercial building with lots of small offices, for instance, the “chopped up” floor space could be a big issue if all the nearby businesses are shops and the location would likely draw a retail business tenant if it weren’t for the incompatible floor design.

Trends

Keep an eye out for patterns in the type of property you are lending against. Are values increasing, decreasing, or staying the same? Are there many for sale or for lease signs on properties like mine in neighborhoods like mine?  If so, why, then?

Income
It is crucial to ensure that the income estimates are reasonable because the value of rental properties is typically calculated as a multiple of net operating income. Find out what they are paying and what the terms of their leases are by speaking with other tenants.

Send an estoppel certificate to the tenant(s) as proof that the rent is currently being paid.

Vacancy Factor
Verify the accuracy of the vacancy factor used in the financial analysis by examining properties that are similar to this one. What is the area’s comparable properties’ vacancy rate? What is the distribution of vacant positions?

Expenses

Verify that the property’s costs are appropriate and that fair growth is anticipated for those expenditures in the future.

Capital Expenditures

Make sure the proper capital reserves are set aside for financial assumptions. Capital costs will vary depending on the type of property. Appliances, carpet, and roofs may be included in rental homes, whereas tenant improvements including heating and air conditioning would be included in industrial office buildings.

Future Zoning Changes / Area Developments

To learn about potential future modifications that have been approved or are presently being proposed, contact the local zoning and planning office. Possible zoning changes or nearby future construction could have a positive or negative impact on value, but they would almost certainly never be taken into account in a standard evaluation because they are outside the purview of what an appraiser does. Three years from now, the value of this property might be significantly impacted by a sizable shopping and residential area that is currently applying for approval with the local planning authority.

A smart option is to inquire about any significant road alterations with the state Department of Transportation. If the interstate on/off ramps will be relocated in 5 years, which will be crucial to know if you anticipate investing in this property for a long time and consider interstate access to be one of its key features.

The ideal way to assess value is through numerous points since this gives you more information from other sources, including yourself, to help you decide if the asset for which you are taking out a loan is worth what you think it is worth. High-impact information might never reach you through the conventional channels for a value report. There is no alternative for independent research that uncovers current or potential future events that could materially damage your investment.

The finest discounts are occasionally the ones you pass up because you weren’t happy with the price.

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