Are you seeking a bridge loan for a commercial property purchase or refinance and want to avoid having to do a formal appraisal? In this guide, we’ll cover a few things to consider when avoiding appraisals and how to find lenders that never require a formal appraisal.
When property owners and mortgage brokers ask us for lender recommendations, many want lenders that don’t require appraisals. The reasons are obvious – time and money. Commercial property appraisals can cost thousands of dollars and take 2 to 3 weeks to produce. The cost and schedule can vary depending on the property type, the size, and how busy appraisers are in that particular market.
Due Diligence Deposits
If you find a bridge lender that does not require an appraisal, it will likely save you time, but it may not always save you money. In commercial real estate finance, it’s very common for lenders to collect some sort of payment when the term sheet is signed to cover due diligence costs. This may be structured as a deposit, so that most of the funds go toward actual costs, and whatever amount is left over will be applied toward closing costs or origination fees.
The deposit amount typically ranges from $2,000 to $10,000. It could be higher for complex property types, loans that include multiple properties or large loan amounts over $10,000,000. As soon as the deposit is paid, there is a solid commitment from the borrower, and the lender will get to work right away.
One quick note about deposits and due diligence:
Even lenders that do require a formal appraisal will typically charge a deposit for due diligence on commercial real estate deals. The appraisal fee may be included in the deposit, so that the lender will pay for the appraiser instead of the borrower paying the appraiser directly. I’ll make a separate video to discuss due diligence fees in detail.
When a lender does their own in-house valuation, it may take a lot of time and resources, especially for large commercial properties worth over $1 million. There’s more to the valuation process than researching and crunching numbers. The lender will likely want to do a site visit and visual inspection. So you’re paying for airline tickets, a rental car, meals and maybe a hotel room. Even if a lender is local to the property, they may still charge for travel costs and time.
We’ve seen some cases where a lender will pay for a third party inspection in lieu of them doing a site visit, but it’s not very common. Some lenders that do their own valuation may still reach out to a local real estate office to get a Broker Price Opinion. This could be another expense.
If you can find a lender that has a local office within a 1 to 2 hour drive of the property, that could save you some money on the due diligence costs, but you also have to consider the pricing for that loan. Perhaps a national lender would offer better pricing than the local lender, even if the due diligence costs are higher.
Other Considerations When Avoiding Appraisals
For those of you who are adamant about working with a lender that doesn’t require an appraisal, we want to mention a possible scenario that could open up your mind about getting a formal appraisal.
Lenders that do their own in-house valuation may be more conservative on the value than an appraiser. You may be certain the property will appraise for a certain amount, but the lender comes up with a much lower number just because they want to be more conservative. If that happens, you may find yourself in a tough position.
Here’s a sample scenario we’ve seen….
You find a lender that doesn’t require an appraisal, you explain the loan request and provide some info on your financial strength, including a list of all your assets. The term sheet looks good, so you sign it and pay a deposit. The lender takes the time to visit the property and completes their in-house valuation. But the value they come up with is way lower than you expected.
To make up for the difference, the lender will require you to bring additional cash to closing, or they will ask you to pledge one of your other properties as collateral. The lender likely knows which of your other properties has sufficient equity, and they may just want to take a 2nd lien on one or more of them to strengthen their position.
This is a great strategy for the lender, but what if you’re not OK with putting a 2nd lien on your other property. By this time, you’ve already spent money and several days working with the lender. You have to make a tough decision of whether to just move forward with pledging the additional collateral, or start from scratch with another lender that will require you to pay a few thousand dollars for a formal appraisal that may possibly come in closer to the value you were expecting.
So the point is: Don’t write off lenders that require a formal appraisal. Avoiding an appraisal may not be the best decision.
How to Find Lenders That Don’t Require Appraisals
You can find direct private/hard money lenders right here on our website, and we have a filter you can use to locate lenders that never require a formal appraisal.
- Start at the Commercial Bridge Lenders page
- Type in a state or major metro area, and click SEARCH
- Click REFINE RESULTS in the Filters section
- Click SHOW ADVANCED FILTERS
- Look for the Appraisal for Commercial field, and select Never
- Click APPLY
- View each lender’s profile to learn about their guidelines, background and more
- Click the green CONTACT button and reach out to the lender directly