The Pitfalls of Trust Deed Investing - Solution to Pitfall 2
Updated: Jun 30, 2021
Take a closer look at loan Underwriting, not just LTV.
SOLUTION # 2 – Loan-to-Own Underwriting What is the solution to loan-to-own underwriting? It is loan-to-own underwriting. How can the pitfall and the solution be the same? Loan-to-own underwriting is the value of the property in relation to the amount of the loan (Example: $1,000,000.00 valuation based on a Broker Price Opinion (BPO) with a $700,000.00 loan on the property, equals a 70% loan-to-value), is very important in the underwriting process, but it is not the only consideration. A mortgage broker should consider the borrower’s ability to pay and exit strategy to ensure that the loan will be beneficial to both the borrower and investors. You do not want to underwrite the loan so that the borrower fails. A good mortgage broker will ask, “What if we have to take a property back?” not “We hope to take the property back.” A good mortgage broker will have a contingency plan in place if the borrower defaults where the loan-to-own strategy would come into play. A good mortgage broker has the confidence and experience to maintain a pool of funds allocated for these situations should they arise to outlay the expenses upfront instead of doing a capital call to the investors with the confidence that recouping those outlaid funds will be returned upon the sale of the property. While a good mortgage broker would look at it through an equity perspective, they would not look at it as an equity play so that they could make equity profit on the back end themselves. They look at it from an equity perspective in that with that built-in equity there, will they be able to recoup their fees and expenses and return 100% of principle to investors, and even possibly back owed interest and if there is additional equity that does not go to the broker, but in fact goes to the investors. Loan-to-own could have two different strategies in underwriting. You need to take a hard look at the mortgage broker before investing and identify whether their loan-to-own strategy is one that is a benefit to the investor.
“The value of the property in relation to the amount of the loan... is very important in the underwriting process, but it is not the only consideration."
At Ignite Funding, we focus on the borrower’s ability to pay and a reliable exit strategy. Our goal is to identify quality borrowers that need financing to further the development of their business in a positive manner. We are not looking for them to fail. We are confident in our success and we have a track record to prove our ability in taking property back on behalf of our investors with a positive outcome. To date, we have returned close to 100% of principle to investors. And if there is additional equity, that does not go to us, that goes to the investors. Our fees to take back the property and act in the capacity Asset Manager is not free, but we earn our fees and fully disclose the fees in our Loan Servicing Agreement executed by every investor and every loan. Just as we want to keep our borrowers, we also want to keep our investors long-term, investing time and time again with us.