What Does It Mean?
An appraisal is a report, prepared by an independent third-party appraiser, that gives an estimate of the value of your investment property. The value will be determined primarily by comparing your property to other similar properties that have recently been sold in the same area. For renovation and construction loans, the appraisal will be prepared "subject to" your planned improvements, which means the appraiser will be required to make some assumptions regarding the quality and scope of the work that will be performed. The appraisal is one of the most important documents that your lender will review during the underwriting process, as the value of your investment property is a primary factor in determining how much money you will be allowed to borrow.
How Does It Affect My Hard Money Loan?
For renovation and construction loans, the appraisal will be performed at the beginning of the project, before any work is performed. For this reason, it is important that you provide the appraiser (and your lender) with a clear plan for completing the property, including detailed drawings, lists of finishes, and cost estimates. If you're changing the layout of an existing property to make the floorplan more appealing, the appraiser needs to clearly understand this, so that he or she can quantify the increase in value. Similarly, if you're renovating a kitchen and installing granite countertops, you don't want the appraiser assuming that you'll be using lower-end finishes. As the appraisal will dictate how much money you can borrow, it is important that you take the time to provide the appraiser with all of the information needed to obtain an accurate valuation.
In all cases, your lender is obligated to provide you with a copy of any appraisals obtained while underwriting your loan request. If you have questions about your appraisal, ask for a copy and review it closely. Despite your best efforts to provide the appraiser with complete information about your construction plan, mistakes do happen and double-checking the facts used in the appraisal can be beneficial. If you have questions about anything contained in the appraisal, don't hesitate to ask your lender.