Private note lending is a combination of both art and science sometimes. The science reviews facts on the ground as evidenced by independent third parties. For example, an early part of the evaluation process is ordering and reviewing a real estate investingthorough property inspection. The inspector dutifully inspects the entire property from basement to roof noting any needed repairs and making sure everything is up to code and if not, the notation is made. If the property needs a new roof, the explanation is made as to why and pictures are taken of the existing roof. Facts observed and action is required.

An appraisal on the other hand is a combination of facts and an opinion made based upon recent sales in the area of similar properties. This is where a bit of artistic license comes into play. For the very same property three different appraisers may arrive at a different “as completed” value. The values will be similar but rarely exactly alike. Since a property that needs a major remodel before it can be sold assumptions are made as to what the property would sell for once all the needed repairs are done. The appraiser then looks at recent sales in the area and makes various adjustments to the value to arrive at a final price.

Investors who fund such projects will have the ability to review both the current state of the property and an appraiser’s opinion what the property will sell for. When a contract is ultimately signed and the property goes into escrow the buyer’s bank will order an appraisal. And according to the bank, the buyer’s loan will be based upon the lower of the sales price or the appraised value. If the value is higher than the sales price, the buyer got a great deal, at least according to the appraisal and if the value comes in lower than the sales contract the buyer must make up the difference.