When you are working on a private mortgage file, understanding your client’s home value before submitting the deal can save you and your borrower a significant amount of time. Property value directly affects loan-to-value, and loan-to-value is one of the most important considerations in private lending. If the value going into your calculation is unrealistic, the entire deal can look very different once the lender reviews the property.
This happens more often than you might expect. Homeowners naturally pay attention to the highest sale prices in their neighbourhood, particularly when they have owned their property for a long time. They may remember the house down the street that sold for $1.2 million without accounting for the fact that it was completely renovated, had a larger lot or sold under different market conditions.
As the broker, you do not need to become a real estate appraiser. You do, however, need a reasonable understanding of whether the value your client is giving you makes sense before you begin structuring a private mortgage around it.
Property value can determine whether the deal works
Consider a homeowner who tells you their property is worth $1 million and currently has $600,000 secured against it. They need another $75,000.
Using the client’s estimate, total financing would reach $675,000, putting the transaction at 67.5% LTV. If you are working with a private lender willing to consider financing up to 70% LTV, the deal appears to fit.
Now assume the property is actually worth closer to $900,000.
The same $675,000 in total financing represents 75% LTV.
Nothing about the borrower changed. The existing mortgage did not change, and the amount requested did not change. The property value changed, and that one adjustment moved the deal from potentially workable to outside the lender’s stated LTV.
This is why getting reasonably comfortable with the property value early can make your private submissions considerably stronger.
Start by listening to where the client’s number came from
When a client tells you what their home is worth, ask how they arrived at that number.
The answer can tell you a lot.
If they recently spoke with a local real estate agent who reviewed comparable sales, the estimate may have some meaningful support behind it. If a similar home on the same street sold recently, that can also provide a useful reference point.
On the other hand, the homeowner may be relying on an online estimate, an asking price they saw in the neighbourhood or a sale that occurred a year or two ago. Sometimes the number is simply what they believe the house should be worth.
You do not need to challenge the client or tell them they are wrong. You need to understand the basis of the estimate so you know how much confidence to place in it.
A simple conversation about the property, recent improvements and nearby sales can often tell you whether more research is needed before presenting the deal.
Look at recent comparable sales, not asking prices
A house listed for $1.1 million is not evidence that it is worth $1.1 million.
What matters is what comparable properties are actually selling for.
When looking at recent activity, try to identify homes that are genuinely comparable to the subject property. Location is obviously important, but so are property type, approximate size, lot, age, condition, parking and renovations.
A renovated detached home should not necessarily be used to establish the value of an unrenovated semi-detached property simply because both are located within a few blocks of each other.
Timing also matters. In a changing real estate market, a sale from 12 or 18 months ago may tell you considerably less than a comparable transaction completed recently.
The objective is not to arrive at a formal appraised value yourself. It is to determine whether the value being used to structure the mortgage is reasonably consistent with what buyers have recently paid for similar properties.
Condition can make a significant difference
Two homes that appear similar on paper can have substantially different values.
A property that has undergone a major kitchen renovation, new bathrooms, updated mechanical systems and extensive exterior improvements may command a different price from a similar property that has not been updated for 25 years.
Condition can become especially important on private mortgage files because some borrowers have delayed maintenance while dealing with financial pressure.
Ask enough questions to understand the property. Has the kitchen been updated? How old are the roof, windows and major systems? Is the basement finished? Has there been significant water or structural damage? Have major additions or renovations been completed?
You are not conducting a property inspection. You are looking for obvious information that could explain why the client’s estimate may be higher or lower than comparable neighbourhood sales.
Be conservative when the deal is close to maximum LTV
The closer a deal is to the lender’s maximum LTV, the more important an accurate property value becomes.
If a transaction works comfortably at several different reasonable property values, a modest valuation difference may not materially affect the deal. If the transaction only works when the property is valued at the very top of the plausible range, you should recognize that before submitting it.
For example, there is a meaningful difference between saying, “The property appears to be worth between $900,000 and $950,000 and the deal works at $900,000,” and saying, “The deal only works if the property is worth at least $950,000.”
The second file has considerably less room for error.
Being conservative does not mean undervaluing your client’s home. It means avoiding a mortgage structure that depends on the most optimistic possible valuation.
Don’t let an unrealistic value waste the client’s time
One of the biggest advantages of doing this work upfront is protecting the borrower experience.
Clients who need private financing are often dealing with some degree of financial pressure. They may have high-interest debt, bruised credit, an urgent obligation or a closing deadline. The last thing they need is to believe financing has been solved only to discover later that the property value does not support the requested loan.
That situation also puts the broker in a difficult position. You now have to go back to the client, explain why the financing has changed and potentially find another solution under greater time pressure.
Setting realistic expectations early is better for everyone involved.
If the client’s estimated property value appears aggressive, explain that the amount available through private financing will depend on the lender’s assessment of the property and the resulting LTV. You can still submit the opportunity, but you have not built the client’s expectations around a number that may not hold.
A strong submission makes it easier for the lender to respond
When sending a private mortgage opportunity, give the lender enough property information to understand the transaction quickly.
The property address, property type, estimated value, existing mortgage balance and amount requested are fundamental. It is also helpful to provide the reasoning behind the value when you have useful supporting information.
If similar properties have recently sold in the neighbourhood, mention that. If the house has been substantially renovated, include the relevant details. If the homeowner purchased recently and there is a recent arm’s-length purchase price, that is useful context as well.
A well-prepared submission allows the lender to focus on evaluating the opportunity rather than going back and forth with the broker for basic information.
That can be particularly important when the file is urgent.
No appraisal can make a good private deal much easier
Many mortgage lenders require a formal appraisal before they will complete a transaction. The borrower may need to pay for the appraisal, coordinate access to the property and wait for the report before the financing can move forward.
For a client who is already under financial pressure, that creates another expense and another potential delay.
Prudent Financial does not require an appraisal for qualifying private mortgage applications. We assess the property and transaction without requiring the borrower to first pay for a formal appraisal.
For brokers, that can make the process substantially easier. You can send us the property information and deal structure, and we can determine quickly whether the opportunity is something we can work with.
Prudent provides qualifying private mortgage financing up to 70% LTV, so having a realistic property value at the beginning helps you understand whether the file is likely to fit before you submit it.
Better upfront qualification helps you close more deals
Private mortgage brokering becomes easier when you understand the deal before you send it.
The borrower’s credit and income circumstances matter, but private lending puts significant emphasis on the asset securing the mortgage. If you understand what the property is realistically worth, what is already secured against it and how much additional financing the client needs, you can calculate the likely LTV and approach the right lender from the beginning.
That makes you faster, improves the quality of your submissions and reduces surprises for your client.
Prudent Financial works with mortgage brokers throughout Toronto and the GTA on qualifying private mortgage opportunities up to 70% LTV. We can consider bad credit, bankruptcy and power of sale, traditional income verification is not required, and qualifying applications do not require an appraisal. We can also provide same-day approvals and close in as little as three days when the necessary closing requirements are satisfied.
The next time a client tells you what their home is worth, don’t simply plug the number into your LTV calculation. Take a few minutes to determine whether the value makes sense. It can be the difference between submitting a deal that looks good on paper and submitting one that can actually close.
View Prudent Financial’s broker package to learn more about the private mortgage deals we can help you place