4 Ways to Assess a Commercial Property’s Worthiness
Commercial hard money Loans are very useful options for people who face difficulties with their loan applications with conventional financiers or banks. Furthermore, private lenders are more open to originating ‘cash-out’ loans on commercial properties.
To qualify for a hard money loan, the subject property needs to have value. So, the first step in obtaining this kind of loan is to verify the market value of your property and see if it is suitable for a commercial hard money loan.
Location
The subject property’s location is an important part of the equation as it decides the depreciation rate. Properties located in developing areas are always more desirable.
Appraisal
As a rule of thumb, lenders provide up to 65 percent of your current property value (this may be higher for purchases). Therefore, it may be a good idea to estimate the value of your property and compare it against the amount of money you’re looking to acquire.
It is important to get the latest estimate along with an interpolated value for the future months. An easy way to find out is to get your property appraised by a licensed evaluator who can set a price on your property based on existing market conditions. One should first inquire with the particular lender they want to use, as many lenders will only accept appraisals from their approved appraisers. Other options are to check the tax records for a current value (this may not be very reliable) or get a broker’s ‘opinion of value’. A broker can be a good source because they are familiar with sales of similar properties. They will usually charge a fee much lower than the cost of getting an appraisal.
Commercial lenders also consider several aspects relating to the performance of the subject property when evaluating a loan application (in the case of an income-producing property): capitalization rate, cash-on-value rate, depreciation, tax rate, gross rent expectancy and multiplier, maintenance, insurance cost and loan to value ratio among others. An appraiser will also consider all these figures, therefore it’s imperative to keep good financials and records
Ownership
You must be the owner of the subject property you want to pledge as collateral for a hard money loan. This means that you need to have solid documentation that proves that you are the owner of the property. Most lenders will require a title search report from a title company to document the property’s history.
If the property in question is co-owned, you’ll require a legal document stating that the other owner does not have a problem in letting you mortgage it. Some lenders do not accept properties held as joint ownership while others may require all owners part-take in the loan.
Furthermore, most hard money lenders will require a first lien on the subject property, meaning any existing liens must be paid from the loan proceeds (unless a different agreement is reached).
Condition
Does the subject property have any deferred maintenance issues? When estimating the value of the property many lenders will discount any cost associated with required maintenance in case they need to take the property back. It is important to maintain properties at all times, as remediation costs can be detrimental when negotiating the loan amount a lender will lend.
