June 20, 2024


Imagination at work

Estimates and Their Impact on Funding Property Acquisitions

A lot of what goes into property investing is based on estimates. Investors offer estimates on nearly every aspect of a new project for purposes ranging from funding to achieving the desired ROI. Funding is of particular concern due to its direct impact on an investor’s success.

Estimates are everything when it comes to funding property acquisitions. There are three types of estimates investors may have to consider: current property value, rehab costs, and resale value. Getting the estimates wrong by a minimal amount should not have a major impact. But get them wrong by a lot and an entire project could be derailed.

Estimating Property Value

The first estimate, current property value, directly impacts an investor’s ability to obtain funding. Let us look at a hard money loan made by Salt Lake City’s Actium Partners as an example. An investor asks for $500k on a property he has estimated to be worth $1 million. In fact, he has signed a purchase contract at that price.

Actium Partners will send its own people out to appraise the property. If they come up with an estimated value of $750k, there’s a problem. The borrower’s overestimation has put him in a position where he is not likely to get the hard money loan he was expecting. He might still be able to work out a deal, but it is not going to be as easy as originally anticipated.

Conversely, underestimating the value could work in his favor. A piece of property worth more than the investor estimated supports his loan application with added value he did not know was there.

Estimating Rehab Costs

The next scenario involves properties that are going to be acquired, rehabbed, and then put back on the market. Actium does not invest in these sorts of projects, but other hard money lenders do. Those lenders expect investors to come up with reasonable rehab estimates so they know exactly how much money the project will cost.

Underestimating rehab costs can jeopardize an investor’s finances after the fact. Even though he might be able to get a loan to acquire a property, he may not be able to get rehab financing. Not only that, but the investor might also exhaust his cash reserves to get rehab finished. Now he has no money for a down payment on a new property. He needs to wait until the current property sells.

This is a problem because hard money lenders tend to require sizable down payments. An investor with too much cash tied up in rehab costs is limiting his own ability to acquire new properties.

Estimating Resale Prices

Finally, an investor who does not plan to hold on to a new property long term has to come up with a resale price estimate before moving ahead with a purchase. He is depending on sale proceeds to pay what he borrows and put some profit in his pocket. Overestimating resale value hurts the investor’s ability to do both.

Overestimating on a single house isn’t the end of the world. But if an investor has a history of doing so, it could impact his ability to borrow in the future. Hard money lenders want to see a track record demonstrating an investor knows what he’s doing. A track record of poor performance doesn’t make an investor look too good.

Property investing is a tricky business. A lot of what goes into it involves estimates. Fortunately, time and experience are all most investors need to produce fairly accurate estimates on new projects. That’s good. How well they estimate expenses and revenues directly impacts their access to funding.