Mailbag: Is an Appraisal Required for a Private Money Loan?

I am pleased to announce the new category for Private Money Blog!

The Reader Mailbag is a question and answer series which will be more in-depth and cover more topics than the standard frequently asked questions. (FAQ’s)

I will be providing detailed answers to actual questions and scenarios that come in from our clients and blog readers.  As you get to know me over time, you’ll learn that I tend to give you the short answer as well as the long answer.

Rather than give a simple Yes or No response, I go into detail to explain the reasons behind the answer. This helps you get a better understanding of the topic covered. My sincere hope is that this new mailbag category will add value to your ongoing education on real estate and financing.

With that being said, I’m starting off this new series with a common question I have received several times in the past couple months…


Do I need to get an appraisal?


Yes.  Most transactions will require a complete appraisal of the property.  This applies to both purchases and refinances.

And Here are the Reasons Why (The long answer) …

An appraisal is a third party tool used to establish two main points for lending purposes:

1.   Fair Market Value

2.   General condition of the property


Market Value

Since private money loans are based on the property and the equity, it is critical to determine the current market value of the property.

The loan amounts are set as a percentage of the property value, so it’s very important that we make our best effort in arriving at the best estimate of value.

In some cases, we can approve and fund a loan with no appraisal. However, these transactions are treated on an exception basis for low LTV’s when we can easily determine a reasonable value for the property.

We are currently funding approximately 1 out of 5 loans without appraisals. We will certainly review any scenario for you to see if it makes sense to close without a full appraisal report. It is especially helpful when we are familiar with the local market and property values are rising.

For example, a $100,000 loan secured by a 4-plex in downtown Santa Rosa should not be a concern with regard to value. Most single family homes are selling over $250,000 in Santa Rosa, so a $100,000 would be a very low risk compared to the potential market value of a 4-unit income property.

Property Condition

Aside from providing a professional opinion of value, a full appraisal will include interior and exterior photos of the property.  Since lenders may not get the chance to physically see the properties, we rely heavily upon the ‘eyes’ of the appraiser and the report to show us the general condition of the property.

Based on a visual inspection, the photos would reveal any visible damage to the inside of the property and whether obvious repairs are needed to bring to the property to an average marketable condition.

We do not require home or pest inspection reports, so this is yet another reason why the appraisal report is so important in evaluating your requested loan amount for approval.


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