Why Hard Money Lenders Require Comparable Properties in Funding Requests
Hard money lenders often request borrowers to provide at least three comparable properties (“comps”) when applying for funding. While this might seem like a straightforward requirement, it’s a critical step that goes far beyond simply meeting a checklist. Comps help lenders assess the After Repair Value (ARV) of a property, providing a clear picture of its current and potential value after renovations. However, misconceptions about how comps influence approval and funding persist among borrowers and brokers. Let’s dive deeper into the importance of comps, common pitfalls, and what lenders evaluate beyond the surface.
Understanding the Purpose of Comparable Properties
The primary goal of requesting comps is to ensure a thorough and realistic evaluation of the property’s ARV. Comps allow lenders to:
- Validate Borrower Projections: Borrowers submit comps to demonstrate their valuation process, giving lenders insight into how thoroughly the borrower understands the market.
- Assess Market Trends: By analyzing comps, lenders can determine whether the projected ARV aligns with broader market conditions.
- Gauge Project Feasibility: Comps help evaluate whether the budget and scope of work are adequate to achieve the desired ARV.
Common Misconceptions: “3 Comps = Approval”
A common misconception is that providing the required three comps guarantees loan approval. Borrowers and brokers may mistakenly believe that as long as the submitted comps support the projected ARV, the lender will greenlight the deal. However, lenders assess comps within the broader context of underwriting standards.
For instance:
- Comps must meet specific qualifications, such as being within a 15% size variance, from the same subdivision or neighborhood, and sold within the last six months. Properties crossing major dividing lines like highways or in distinctly different market areas often cannot be used.
- Lenders analyze more than the provided comps. If market trends suggest declining values or oversupply in the area, the ARV may be adjusted even if the comps appear strong.
Red Flags for Lenders
Borrowers providing unrealistic or inconsistent valuations can be a red flag for lenders. Some key concerns include:
- Large Discrepancies in Valuations and Budgets: When the submitted budget doesn’t match the level of renovations needed to reach the ARV indicated by the comps, lenders may question the borrower’s expertise or commitment.
- Overreliance on Inflated Data: Borrowers working with third-party property groups or relying solely on investment summaries often overlook discrepancies between marketing claims and actual market realities.
To mitigate risks, lenders encourage borrowers to independently verify figures, conduct their own due diligence, and avoid relying solely on optimistic projections from external sources.
The Role of Market Trends
Underwriters consider more than just three comps when evaluating a property. They analyze overall market conditions, such as:
- Local Demand: Are properties in the area selling quickly, or is there an inventory surplus?
- Price Trends: Have home prices been appreciating, stabilizing, or declining?
- Neighborhood Dynamics: Changes in demographics, amenities, or zoning can influence property values.
Even if comps meet all underwriting guidelines, a cooling market may warrant a more conservative ARV.
Tips for Borrowers: Comping Best Practices
Borrowers can strengthen their funding applications by following these best practices:
- Stick to Guidelines: Ensure comps meet the lender’s criteria, including proximity, size, and age similarities.
- Be Honest and Realistic: Provide a conservative ARV that aligns with the current market, not just the best-case scenario.
- Vet Third-Party Sources: When using comps from investment groups or listing sites, double-check their accuracy and applicability to the project.
- Factor in Market Trends: Research local market conditions and anticipate how they may impact your ARV.
Lender and Borrower Alignment
Hard money lenders are partners in your investment journey. By providing accurate comps and demonstrating a clear understanding of the market, borrowers can build trust and confidence with their lender. Comps are not just a box to check—they’re a cornerstone of underwriting, ensuring both parties align on the project’s potential and risks.
At FlipCo Financial, we aim to empower borrowers with transparent guidelines to ensure their investments succeed. With thoughtful preparation and an eye on the market, you can maximize your funding opportunities and achieve your real estate goals.
For more information on how to select appropriate comps, refer to our Comping Guidelines or reach out to our underwriting team.
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