How To Determine the Collateral Value of Your Property

Written by  //  August 10, 2022  //  Home Insurance  //  Comments Off on How To Determine the Collateral Value of Your Property

How To Determine the Collateral Value of Your Property

Despite the fact that house flipping can reel in heaps of cash, it is not as simple a business venture as it might seem. You must first obtain the property to start working on it, of course. But you may not have the means to purchase it, so a loan is the only option. However, most banks won’t lend such high amounts of money to someone so quickly, and the vetting process can take weeks.

With the real estate market always in flux, hastiness is a norm, which is where hard money loans come in. These loans allow you to use a property or any asset you own as collateral. However, you might not know how much it’s worth, which will affect your loan amount. Keep reading for how to determine the collateral value of your property.

Business of Flipping

Many people will use their existing assets as collateral when obtaining a property they plan to flip. The reason is that they may not have the ability to purchase the property outright, in which case they will need a hard money loan. Hard money loans are popular in the flipping world as they lend a large amount of money to purchase a property in a short time.

Doling out that much cash with such a short turnaround presents a risk for lenders should your venture result in failure. That is why many borrowers will put their assets up as collateral. If the borrower cannot pay back the sum, the lenders will receive the property the borrower put up as collateral.

Collateral Value

Collateral value is a term used to describe the fair market value of a resource you have, like a property, in order to obtain a loan. If you are a borrower who has a riskier application, lenders won’t deny you outright, as you may be able to still obtain one by putting an asset up for collateral. The collateral value of your property is one thing to consider when obtaining a hard money loan. The value of your property affects how comfortable lenders feel working with you.

Determine Worth

To determine a property’s collateral value, your potential lenders will investigate the price of sales that similar properties have sold for recently. Moreover, you can also have the property appraised by a real estate specialist to obtain a qualified value. Once you have this value determined, you can then get an accurate estimate of the risk of your application, which affects the details of your loan. This value is formally known as the loan-to-value ratio.

Loan-to-Value Ratio

The loan-to-value ratio is an estimate that compares the amount of the loan you have secured and compares it to the appraised value of the property or collateral. You want to aim for a ratio that is either at an 80 percent threshold or lower. The lower your ratio, the more likely you are to gain approval. What’s more, this low threshold will result in lower interest rates as well.

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