Process Is Your Protection A LENDER’S PERSPECTIVE ON FINANCING REAL ESTATE INVESTMENTS
by Romney Navarro
rowth in the real estate investment industry over the
More specifically, thorough due diligence during underwriting and a tested loan servicing process protect everyone involved in the investment. There are three basic pillars for vetting a real estate investment that should factor into every decision prior to financing a project and throughout the course of a loan. THE MARKET Without realistic expectations in place at the outset, it’s impossible to estimate the viability of a real estate project. Before a lender funds any real estate investment project, they conduct thorough due diligence through a stringent underwriting process. A seasoned lender will have spent years — even decades — developing a thorough understanding of the
housing market in which they operate. This is arguably the most crucial aspect of the business because without knowing the intricacies of the markets, it’s difficult to accurately estimate the after- repair value (ARV) of a given property or gauge how long it might sit on the market. Not only should they examine the selling price of comparable homes in the area, but they need to understand pricing trends over time. While it’s not always easy to predict what the market will look like a year down the road when a project is finished, understanding data points like the absorption rate, months of inventory, and the average days a home spends on the market helps lenders more accurately predict the outcome of an investment.
past decade has been staggering. As opportunity has grown more abundant, big banks have seized the opportunity to make money by pumping capital into the sector. This has made financing more available for private lenders and real estate investors. But it has also created an imbalance between capital and expertise. If a loan isn’t strictly underwritten or subject to thorough servicing processes, it could spell disaster for both lenders and borrowers. It’s crucial to have proven processes in place as an added layer of protection that ensures every real estate investment loan has the best possible chance of success and can achieve the maximum return.
64 | think realty magazine :: april 2020
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