Underwriting isn’t just paperwork. It’s the critical decision-making process that protects your capital, increases your returns, and ensures you’re backing the right borrowers on the right deals.
Whether you’re a private lender, fund manager, or hard money investor, mastering the art of underwriting gives you an edge — and saves you from costly mistakes. Here’s a practical breakdown of how to underwrite like a pro.
1. Start With the Borrower — Not the Property
Great properties in the wrong hands can become financial disasters. That’s why your first focus should be the borrower’s experience, integrity, and track record.
Questions to ask:
• Have they completed similar projects before?
• Can they show proof of past flips or rentals?
• How do they handle delays, cost overruns, or market shifts?
Review credit history, financial statements, and verify they have skin in the game. You’re not just funding a deal — you’re backing a business operator.
2. Verify the Exit Strategy
Is this a flip, BRRRR, or rental hold? Each strategy affects the risk profile and timeline. For example, flips are short-term but highly sensitive to market shifts. Rentals offer more stability but lower velocity.
You should know:
• Is the exit strategy realistic in today’s market?
• Are they relying on refinance rates that don’t exist anymore?
• Do they have multiple exits in case the primary plan fails?
Red flag: A borrower relying on appreciation to make the deal pencil.
3. Run Your Own ARV and Comps
Don’t take the borrower’s numbers at face value. Always verify the After Repair Value (ARV) using real comps within 0.5 miles, renovated in the last 6 months.
Look for:
• Similar square footage
• Matching bed/bath counts
• Comparable finishes and quality
If your ARV estimate comes in lower, the deal may not work — and that needs to be addressed before funding.
4. Break Down the Rehab Budget
A vague $30K rehab line doesn’t cut it. Ask for a line-item breakdown — roofing, HVAC, flooring, appliances, paint, etc.
Check:
• Are labor and materials realistically priced?
• Is the timeline padded for weather, inspections, and delays?
• Are contractors licensed and vetted?
If the borrower is managing the rehab themselves, ask about past project timelines and oversight experience.
5. Stress-Test the Numbers
What happens if the home doesn’t sell right away? If rates climb? If the market cools?
Make sure the numbers work even if:
• The ARV drops 10%
• The property sits 90+ days
• Construction costs run over by 15%
Your loan should be protected by equity — not hope.
6. Establish a Proper Draw Schedule
Never fund 100% of the rehab up front. Tie funds to milestones like:
• Demo completed
• Mechanical systems installed
• Drywall/paint finished
• Final inspection passed
This keeps the borrower accountable and gives you checkpoints for verifying progress before releasing more funds.
7. Know the Market Inside and Out
A property can look great on paper — but if it’s in a declining neighborhood with oversupply or bad tenant reputation, that’s a problem.
Study:
• Inventory and absorption rate
• Crime trends and school ratings
• Days on market for renovated homes
Local knowledge is power — use it.
Final Thoughts:
Underwriting isn’t just for big banks. It’s your best defense as a lender. Treat every deal like it’s your own money on the line — because it is. The more disciplined your underwriting, the more consistent your returns (and the fewer headaches).
