Key Takeaways
- Hard money underwriting: property value + business plan + exit strategy.
- ARV estimation requires 3-5 comparable sales with systematic adjustments.
- Default rates of 5-8% are driven by timeline overruns, budget overruns, and ARV overestimation.
- Stress testing projects at 20% cost overrun and 10% ARV miss reveals true deal resilience.
This recap consolidates the asset-based underwriting framework for hard money and private lending. Test your knowledge with the review questions below.
Hard Money Underwriting Framework
Hard money underwriting focuses on three pillars: property value (as-is and ARV), business plan feasibility (rehab budget and timeline), and exit strategy credibility (sale or refinance). ARV estimation using comparable sales with systematic adjustments determines the maximum loan amount. Rehab budgets require line-item detail with 10-20% contingency. Exit strategies must be supported by market data. Default risk (5-8% industry rate) is managed through conservative underwriting, adequate reserves, and stress testing.
Go / No-Go Decision Framework
Go Indicators
- ✓Hard money underwriting: property value + business plan + exit strategy.
- ✓ARV estimation requires 3-5 comparable sales with systematic adjustments.
No-Go Indicators
- ✗Treating hard money underwriting as purely mechanical without understanding the lender's risk perspective: Poor deal presentation leads to rejections or unfavorable terms even on viable projects
- ✗Submitting incomplete applications or inconsistent numbers across documents: Inconsistencies trigger deeper scrutiny, delays, and potential deal-killing findings
Sources
Common Mistakes to Avoid
Treating hard money underwriting as purely mechanical without understanding the lender's risk perspective
Consequence: Poor deal presentation leads to rejections or unfavorable terms even on viable projects
Correction: Present deals from the lender's perspective: emphasize property value, exit strategy feasibility, experience, and risk mitigation measures
Submitting incomplete applications or inconsistent numbers across documents
Consequence: Inconsistencies trigger deeper scrutiny, delays, and potential deal-killing findings
Correction: Ensure all financial projections, budgets, and exit plans are internally consistent and supported by market data before submission
Test Your Knowledge
1.What is the most critical factor in hard money underwriting?
2.What contingency percentage should be included in a rehab budget?
3.What is the industry default rate for hard money loans?
4.When a hard money lender caps a loan at 70% of ARV, what are they primarily protecting against?