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Lending

Valuation Options for Lending

As an alternative to traditional appraisals, faster and cheaper valuation options are available to keep your pipeline flowing and your confidence high. In this day in age, where time is of the essence and deals can be completed in a matter of days rather than weeks, there is still one part of the process that can hit a snag rather frequently: Full appraisals can take time and are expensive. However, there are ways to obtain an accurate valuation in a timely manner, without having to break the bank. Hybrid appraisals and evaluations open an opportunity to give your business an edge. They enable you to obtain a valuation quickly to assess risk and to proceed without having to wait a week or more. In addition, many companies allow custom options that allow you to request the kind of information most important to you when assessing risk. Evaluations Evaluations are the fastest and cheapest option in many cases. These can be completed by in-office experts in various companies or local market experts such as real estate agents. They are typically supported by robust data sets and put through rigorous quality control practices. The process can be bifurcated, leveraging a third-party inspection from an inspector, real estate agent or tenant/borrower. The valuations specialist will perform the valuation component and provide a value based on their comparable analysis and the inspection. The advantage of an evaluation is that you do not have to sacrifice valuation accuracy for the time and cost savings. Companies today are using many tools that empower valuations experts to perform consistently accurate valuations. If you have any apprehension about using evaluations, test these products against your appraisals and see if you are getting similar or better results. Dodd-Frank recognizes evaluations as a credible valuation source for transactions below $400,000. There is no transaction limit for any portfolio lending or nonlending transactions. Hybrid Appraisals Hybrid appraisals are another way to reduce cost and timelines and obtain an accurate valuation. This product still leverages the expertise of an appraiser, while obtaining the inspection from another party—either a local inspector, real estate agent or borrower/tenant. The appraiser reviews the inspection and performs the comparative analysis to provide a value. Timelines on hybrid appraisals typically are much shorter than traditional appraisals. They typically cost less as well. If your investor requires an appraisal, this may be a good step in the direction of using alternative products in many situations. When to Use Alternatives Leveraging alternative products is not always the way to go. For complex properties, it makes sense to order an appraisal and have an appraiser perform the inspection. Alternative products should be used in data rich areas where risk is lower than it would be in a more complex scenario. Appraisals may be necessary if you need more information about the asset, such as obtaining a full sketch. However, if the property is in a data-rich market and you have an acceptable amount of knowledge about the asset, then an alternative product could be much more reasonable. Understanding the applicable uses for each product will help determine what should be used and when. In addition to using an alternative valuation as the primary product for the transaction, it is also becoming more popular to introduce different types of alternative products throughout the process for due diligence or initial risk analysis. You may need to learn more before deciding to lend on a particular property. Leveraging an alternative valuation at the beginning of your process may be a low-cost way to eliminate deals that exceed your risk tolerance. Alternative valuations are used commonly as the first sniff test on many transactions, especially in the fix-and-flip space. Getting an initial review of the package from a valuation standpoint can help determine whether a deal is worth pursuing, given the kind of lending you want to perform. Allowing for that kind of early quality check allows your pipeline to flow more quickly and prevents wasted time and effort on deals you may not want to pursue. When it comes to investing, risk is everything. That is why choosing the right product that adequately assesses the risk is paramount. That doesn’t mean an appraisal is always necessary—or even the best product to use. In addition, COVID-19 has created the need for changes throughout the valuation process. Those changes have created opportunities as well as challenges. Many providers now allow the option of having a borrower/tenant perform the inspection. When cooperative parties are involved, that can expedite the inspection process exponentially. Then, leveraging that inspection, you can combine it with several valuation products that are appropriate for the type of asset you are dealing with. These tenant-performed inspections typically leverage a web-based application or an app that can be downloaded that will walk the tenant/borrower through a basic inspection process. Many apps will capture the location of where the photos were taken for confirmation. Knowing when and where the photos were taken provides yet another degree of confidence. These kinds of developments have been game-changers in the age of COVID-19, not only by reducing timelines but also by increasing safety for occupants. When it comes to lending in the current landscape, creativity is necessary for differentiation, competitive advantage and customer service. There are many creative products in the marketplace. Consider testing them out and seeing how they can benefit you, your processes and your customers. Your competition will wonder how you got across the finish line so much faster.

Valuation

The Emergence of Alternative Valuation Products

The days of a one-size-fits-all solution are in the past. Over the years, many things have changed in the real estate industry. That rings true for valuations as well. With the advent of the appraisal management company (AMC) and changes in regulatory compliance, your valuation options may seem limited. However, there are many alternative valuation products available. Many offer lower costs, faster turnaround times and robust data sets to support their accuracy. Conventional appraisals are still required for some transactions, but some of the newer products are backed not only by powerful data sets but also by valuable human expertise. Growing user base sophistication and the dissemination of property data has challenged the status quo of the conventional valuation methodology. This development has ensured that valuations don’t remain stagnant but continue to evolve so that needs are met in an ever- changing environment. This commitment to create customer-centric valuation products that meet needs has been interesting to watch. The various elements of a valuation report are being spliced in order to create something new yet familiar. Valuation Cascades The introduction of the valuation cascade, built on risk factors users set up to account for tolerances based on complexity, allow users to choose the right valuation product for any given asset. That means the user has several options, ranging from a lower- cost desktop valuation all the way to a conventional appraisal. Many different types of hybrid products exist and are suitable for a wide range of needs. Some offer additional sales and active comparables in the immediate area, providing insights into the broader market and giving the user a better understanding of local activity. This is valuable in the investment space because of the unique nature of acquiring and strategically remarketing assets. If you have a low-risk asset with a few repairs located in an extremely homogeneous data-rich area, you may need a desktop valuation. On the other hand, if the area is a little more complex, due to the nature of the asset or the location, a full appraisal may be necessary. Not all properties are the same, and not all deals require the same product. Let’s explore some of these products so you can determine whether any might give you an edge. Bifurcated Appraisals The first of the new wave of products to review is the bifurcated appraisal. Bifurcated appraisals provide a lower-cost option while leveraging appraiser expertise. This streamlined tool allows for an option when a traditional appraisal is not necessary and leverages local market appraisers for both the inspection and the valuation. Considered just a step down from a conventional appraisal, a bifurcated appraisal is a great option to use in many lower-risk scenarios and when a sketch is necessary. Hybrid Appraisals Hybrid appraisals are similar to bifurcated appraisals. The difference is they rely on a non- appraiser to supply the inspection. This allows for a lower cost and often a faster turn-around time while still leveraging the valuation expertise of a local market appraiser. Additional Expertise Types Another change in evaluation options is the entrance of additional expertise types in origination transactions. Evaluations can be completed by local market real estate agents and other valuation professionals in the space. These products come in a variety of options. The requirements are standard, but the forms are not universal, allowing for custom options. Evaluations can be used for value determination in conventional lending transactions with less risk in many states. They can be used for any portfolio lending you perform. They exist in traditional form with the local market expert performing the inspection and valuation component. Or, they are available in a hybrid fashion that leverages a local professional performing the inspection while a specialist at the desk completes the valuation. These options provide a variety of price points, giving borrowers more economical solutions. This kind of flexibility allows the user to make decisions on what works for them and their portfolio. Combining Products The other interesting thing occurring in the valuation space is the combination of different products. In the world of investment projects, whether it be fix-and-flip or long-term rental, understanding the potential value of a property is critical. Not all projects are the same, and valuation professionals are not always well-versed in repair costs. This has historically presented a problem in the valuation space. That’s why additional options that rely on consuming external data have become more and more important. Being able to combine repair bids with valuation products has increased the ability to estimate an asset’s “as-is” value. This has been the largest challenge when it comes to assets that need significant rehabilitation. Combining multiple products and providing valuable insight to the valuation specialists allows professionals to focus on their expertise without having to fill in the blanks. This kind of consolidation means users aren’t left making decisions based on a valuation that doesn’t have all the necessary information. Other hybrid products that are offered consume the repair bid/property inspection as the means of seeing the property for the purpose of the valuation. This affords users even further reductions in price and allows them to pay only for what they need. Having options for managing your cost, time and portfolio needs is important for creating a competitive edge and getting accurate data for analysis and decision-making. The days of a one-size-fits-all solution are over. To stay ahead of the curve, you must discover different means to achieve the same or better result. Doing so can make all the difference. As times continue to change, your options will continue to evolve as well. Be diligent about reviewing your needs and staying on top of the tools that are available. Challenge the norms to discover what works best for your organization.

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