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.
