During a recent loan underwriting we received a Broker Price Opinion (BPO) stating that the value of the residential property was $300k. The BPO Agent saw two units on the subject property and then gathered two unit sale comparables in the surrounding area. We received the BPO and offered 65% Loan to Value (LTV) or a $195k loan amount. However, upon further due diligence including a site visit, the R1 Zoning of the property became evident. The 2nd unit on the property was not permitted but had been used in the BPO valuation. We called the BPO Agent and asked what the value of the property would be as a single unit and the answer was $225k. We lowered our loan amount to 65% of the $225k or $146.25k and we lost out on the loan.
So what is the big deal? What is the purpose of this story? Well, the problem is that another Hard Money Lender (HML) saw the $300k BPO and loaned the borrower the $195k. Maybe that HML did not realize and piece together that the higher BPO was for 2 units and the property was only zoned for a single unit. The investor working with that HML is now into the loan at an unacceptably high 86.67% LTV. The loan might work out as the borrower was well qualified, however that R1 vs. R2 Zoning experience reinforced our belief that All Trust Deeds are not created equally.
Underwriting guidelines, experience, funds availability, expertise and a variety of other factors mentioned below make Trust Deeds unique investments. Trust Deed Investors should pay close attention to the following 5 elements when underwriting a loan:
- Loan to Value (LTV): LTV offers “equity protection” meaning that the lower the LTV, the more a Trust Deed Investor’s capital is protected from loss.
- Valuations: We all know that every property is truly unique. Who provided the Valuation on the property? An Appraiser? Real Estate Agent? The HML? All are capable of delivering accurate Valuations, however on the particular loan that is being considered, did the person really value the property correctly? Was the Zoning vs. Actual use verified? Were the Comps really relevant Comps? Were “As Is” vs. After Repair Value (ARV) estimates complete and justified?
- Ability to Pay and Exit Strategy: Was the borrower’s ability to pay the monthly loan payment researched and verified. Is the exit strategy for the loan viable?
- Compliance: Was evidence for the correct loan purpose and occupancy status provided? Were oral disclosures documented? Were proper disclosures, loan terms and documentation given? While many lenders try to get compliance right, sometimes a costly error can be made out of ignorance and that ignorance can cause huge legal or loan enforcement issues later.
- Property Visit and Borrower Meeting: Did the HML visit the property and meet the borrower to verify that the loan scenario being offered truly is the loan scenario?
Trust Deed Investors should realize that Trust Deeds are as unique as the property and the borrower. Prudent investors monitor the individual Trust Deed and qualify their Trust Deed provider to ensure that the investment will perform as indicated. Mortgage Vintage, Inc. provides Fast and Professional Private Money Loans and Trust Deed Investments.
Do you have any current real estate investment opportunities that need Private Money? We would like to know.