Assessing the Quality of an Underlying Property and Borrower

As with any real estate transaction, mortgage investing requires an assessment of two key items: the value of the underlying property and the creditworthiness of the borrower.

Starting with the property, our first step is to have an appraisal performed by a reputable third-party appraisal firm to verify that it complies with our requirements. The appraisal includes the type of construction as well as comparable transactions in the same geographic area and asset types over the past 6 to 12 months to estimate its current value. The next step, even if the appraisal firm is reputable, is to send another third party to view the property and confirm that it is what the appraisal says. (Although it’s rare, it’s not unheard of to have an appraisal report that mis-categorizes, say, a class A office building as a class B warehouse, or vice versa.) In some cases, such as a very large loan or property, one of the principals of our firm will go and view the property in person. Although basic market research is part of the appraisal report, high-value properties may also require additional research on current market trends in the area, as well as a stress test to assess the possible scenarios over the lifetime of the loan. In other words, the property may be worth $1 million today, but what happens if property prices go down?

On the borrower side, assessing quality comes down to a commonsense approach. In the mortgage investing world, the principles are exactly the same as going through a bank or financing company, so the assessment includes looking at credit scores and a background check. Because we’re occupying a niche that’s not filled by conventional lenders or credit companies–and because the mortgage lending industry is highly competitive–our process is somewhat more lenient. We’re prepared to be flexible, doing everything reasonable and adequate to accommodate each borrower’s situation–while commanding rates of return for our investors that compensate them appropriately and protect them with above-market levels of equity.

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