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Why the Valuation Method Matters

Valuation Method Matters

If you’re considering investing in real estate as a private lender, there are a few terms you’re going to need to learn to help you protect your investments. One of those terms is “valuation method.” It is one of the most important terms you’re going to learn as a private investor in real estate loans.

What does it mean?

This is the term used to describe the process by which you assign value to a possible investment. It is a complex process. In the matter of private money investing in real estate, there are a few key factors you need to include when determining whether a property or investment opportunity is a good match for you. These factors include:

  • The value of the property being used to secure the loan.
  • The location (and condition of the location) of the property in question.
  • The estimated value of the property upon project completion.
  • The amount of money needed to complete the property acquisition, repairs, renovations, build, etc.
  • What your lien position will be. Hint: you want to be number one in most cases and rarely ever want to settle for less than the second position.
  • Borrower’s reputation.
  • Borrowers credit history.
  • Borrowers experience with this type of property investing.
  • Down payment borrower is making – his level of risk going into the transaction.
  • Going interest rates and terms for this type of investment.

Additionally, you should resist the temptation to discount your gut feelings about a project. If something makes you nervous or leaves you feeling unsettled, walk away. It really is as simple as that.

The other term you absolutely need to know and understand is loan to value. The loan to value ratio is determined by dividing the mortgage lien by the property’s appraisal value. It is expressed as a percentage that represents how much equity there is in the home. For instance, if the LTV ratio is 90 percent, it means that the borrower has 10 percent equity in the property and is financing 90 percent.

This matters to you as the more equity the borrower has in the home, the bigger your safety net becomes if something goes wrong and the property is assigned to you. The larger the LTV ratio is, the greater your risk happens to be.

That is something you should discover during the loan valuation process and one of the factors that should carry a great deal of weight when determining how attractive a particular investment happens to be.

While it is easy to get caught up in the vision of an investment and see nothing other than massive dollar signs on the other side of a potential investment, you must treat each one individually and practice the same process of ruling out negatives in order to protect your capital. Sometimes, it is better to make the less glamorous investments that offer nearly guaranteed returns and meager profits than it is to take big risks and lose even bigger.

It’s true that all investments carry some degree of risk, but there are always plenty of borrowers looking for investors like you. This means that you can make multiple deals for smaller profits – at lower risk – and still bring in an impressive return on your investment. Using a consistent valuation method and sticking to it will help you enjoy greater success for short and long-term investments.

As for finding eager borrowers, we can help with that! Contact us today to learn how we can connect you with people interested in borrowing from private lenders for their real estate and other investments.

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