Property Valuation Options for Private Lenders

New private lenders often ask me how I review properties that I will be potentially lending on and using as collateral to secure the loan. Most assume the only options are to use free online tools or pay for a professional third-party appraisal. But many individuals who want to lend out their capital in a private money loan may not be aware of other alternative valuation services available for a low cost. In this article, we’ll break down some property valuation tools, both free and for-cost, that can be cheaper and faster than obtaining a third-party appraisal, which in some cases, may not be feasible or necessary.

Free Valuation Tools and How to Use Them

Everyone knows about Zillow.com and those who have used it enough are familiar with the socially accepted belief that Zestimates are not accurate. But did you know you can still use Zillow for evaluating a single family or small multi-family property and come up with a reasonable estimate of fair market value? Redfin.com is also another free online property search tool with some features that can help private lenders in property valuations.

Online platforms like these aggregate data from public sources and elsewhere with factors like home facts, property location, and market conditions taken into consideration. While generalized systems logic can create an auto-generated value and be a great starting point, it won’t replace human subjectivity so you should refine these data points to ensure you have the most accurate estimation possible. Remember, a value can be a range, rather than an exact number depending on variables you are unsure about such as interior condition, if you haven’t seen pictures yet or completed a walk-through.

Here’s what you need to know:

 - Start with the Zestimate Range as a starting point only, do not use the Zestimate Value.

 - “For Sale” properties are not comps until they sell. Only search “Recently Sold” properties within the past 60-90 days and not older.

 - Refine specific property parameters such as ¼ mile radius, livable square footage within +/- 200 sq ft, amenities like a view, etc.

 - Redfin.com has a section for recently sold comparable properties located towards the bottom of a property page that you can even view on a map (look for “View comparables on a map”).

  - Using these tools coupled with Google Maps can give you a better idea of a property’s neighborhood virtually, when visiting the area in person is not an option.

While not perfect, these tools can assist you in determining an estimated range for a property in its as-is condition as well as after-repair value (ARV) prior to deciding whether or not to fund the loan. If you choose to proceed, you may require a more comprehensive valuation to be done as part of your due diligence.

Paid Online Valuation Tools

There are several platforms that offer a range of valuation tools from self-service online tools (like Zillow with more refinable search results features) to valuation products that you can order to be completed on your behalf. These tools are available to most private and conventional lenders though some may have minimum usage thresholds that may exclude individuals who only lend a few times a year.

• - HouseCanary.com: This company focuses on creating the most accurate predictive analytics through machine learning, dynamic modeling, and cloud computing and has more search functionality to allow a user to really refine the search results. There is a pay-as-you-go pricing model that is $29.99 per report and gives you the first report for free so that you can try it before you buy it. Valuation reports can be sent as a web link or a PDF for your files. One limitation is this tool is good for single family properties but does not do commercial or multi-family properties.
• - Home | Collateral Analytics: A division of Black Knight, this platform offers an array of products for valuation as well. One thing this company offers is better commercial valuations. Costs range depending on the product you choose but for the interactive AVM (automated valuation model) pricing starts at TBD and goes up to TBD for more.

Both companies offer an array of products aimed at helping real estate professionals and lenders conduct virtual evaluations of not only the property but the neighborhood, the MSA (market statistical area), and other factors that could affect property values such as crime, natural disasters, growth demographics, etc. These will range in price and functionality, so we suggest requesting a demo from the company before proceeding.

The Modernization of Property Valuations

If you don’t feel comfortable or have the time to conduct your own property analysis, you can obtain an array of valuation services from professionals ranging from real estate brokers, certified appraisers, and more. Many of the companies mentioned above offer these services and range in comprehensiveness and pricing. Additionally, many private lenders who want to free up their capital by selling performing loans on the secondary market will be required to have a third-party valuation completed as part of the initial underwriting, making these types of options a requirement.

Some of the national valuation service providers out there include Clear Capital, Appraisal Nation, USRES, and Boxwood Means, LLC. This is just a small list of valuation services that you will want to research thoroughly before selecting a vendor to work with on your loan opportunities.

At the low end of services offered by valuation companies would be an AVM, also known as an automated valuation model. These are common with some banks and lenders who want to offer a more simplified valuation approach to speed up the financing process. While investors often shun these types of valuations due to often being more conservative in valuation and thereby lowering their overall loan amount, this could be a benefit to private lenders not yet experienced in property analysis. While the borrower may scoff at first, conservative AVMs may help provided added protection.

One step up from the AVM would be a BPO or Broker’s Price Opinion, also known as a BOV or Broker’s Opinion of Value. These typically is conducted by either a real estate agent or broker, as it’s suggested, or it can also be done by an appraiser however it will not be as comprehensive as an appraisal that meets USPAP (Uniform Standards of Professional Appraisal Practice) standards and state laws. Due to potential legal ramifications, most appraisers typically decline to do BPOs, in my experience.

BPOs can include exterior only (sometimes referred to as a drive by) or can include interior inspection as well. Some solution providers may offer to complete this service with only pictures of the property and not require an inspection. The variations on what and how this can be completed can create inconsistency in quality of these types of reports. Just as we recommend with Zestimates and other online searches, you will need to review your AVM or BPO report carefully to ensure the comps provided are reasonable and accurate.

I once had a BPO done on a single-family property just outside Seattle which was an average tract home in a typical suburban neighborhood. Once the report came back, I saw that every comparable property in the report wasn’t even in the same city as the subject property, let alone the same zip code. There were no unique aspects to this property to merit a wider geographical search than the typical ¼ - ½ mile radius. All three comparable properties identified were in different cities nearby with the closest one being about five miles away. In another instance, when a commercial BPO was ordered for a mobile home park, the service provider came back with a valuation of a single mobile/manufactured home, rather than the park itself.

Most of the time, because of the oversimplified approach and lack of human bias, these reports can be done within a few days to a week, which is substantially less time to complete than an appraisal. It’s also considerably less expensive in most cases, as well.

Summary

While all these self-serve options and modified valuation services can help expedite your lending timelines, all should be carefully considered over an appraisal and should not be taken at face value. Doing so could cost your more in the long run after the loan funds if you do not apply your own evaluation of the property condition and value being established by your chosen vendor. However, using these types of third party services coupled with your own personal review can substantially reduce costs, time commitment, and help you get loans across the finish line in a safer and more secure manner.