COVER STORY
PEERSTREET
EQUITY, DEBT, AND LOAN-TO-VALUE (LTV)
DISASTER 101: WHAT HAPPENS WHEN THE WORST HAPPENS THE “METH LAB RENTAL” CASE STUDY A s an investor, can you imag- ine anything much worse than
EQUITY Equity = borrower’s investment and a cushion that she “protects” the debt investment.
icals, including battery acid, drain cleaner, lantern fuel, and antifreeze. These “labs” are generally not con- tained or sterile, and the substances, toxic alone and worse in combination, tend to permeate the entire living area. “There’s chemical waste, remediation, all sorts of potential issues,” said John- son. “The poor landlord did not know what to do.” However, because the group spotted the problem early, as soon as the red-tag went into effect, the PeerStreet teamwas able to leap into action. “We have an active internal manage- ment team for each loan,” explained They remediated; the borrower kept making loan payments, and we found a new tenant. Our investors actually got more money out of the deal than they originally anticipated while our due diligence also saved the property for the landlord as well.” “I can’t think of a worse scenario than finding out you loaned money on a meth lab,” said Johnson. “The fact that everyone involved, includ- ing the landlord and the neighbor- hood that is now meth-lab free, ended up in a good place makes us really, really proud.” Crosby. “We were able to notify the insurance company, and the entire issue was covered by the in- surance policy because we had the right policy in place.
finding out the tenant to whom you rented your property had installed the latest in meth-lab technology in the basement of that rental? Once you’ve recovered from the cold chills you are probably now experiencing, take things one step further. Can you imagine owning the property years later and turning a healthy (non-drug-related) monthly profit on it? If you can imagine this kind of success coming out of a potential disaster, then you are likely already working with PeerStreet. Brew Johnson and Brett Crosby cite “the meth-lab rental” as one of the worst potential disas- ters they have ever encountered. “We had a client who had made a loan to a landlord so that she (the land- lord) could purchase a rental property. About six months into the loan term, we received a notice that the house had been ‘red-tagged’ because there was a suspicion of a meth lab in the basement,” recalled Johnson. Illegal drug manufacture and distri- bution of any sort is bad enough news, but the installation of a methamphet- amine lab is particularly nasty. Meth is manufactured using common cold remedies and a number of toxic chem-
DEBT Debt = Your investment on PeerStreet.
with an extremely large amount of capi- tal,” Crosby said. In 2013, the pair teamed up to build what would eventually become the PeerStreet platform. Johnson and Crosby emphasized that PeerStreet is not a lender, but a mar- ketplace for people with private money to fund real estate deals and for people with real estate deals to find funding [see graphic on pg. 21]. “Our lenders tend to know their space very well, which gives our borrowers a big advan- tage because not only do their loans get underwritten faster, but the lender on the project likely has knowledge of other factors that may be specific to the location of the project,” said Johnson. The company secures its loans with first liens on the collateral, which means that if a loan does go into default, PeerStreet investors will have first priority when it comes to repayment on the loan. LTV is calculated by dividing the loan amount by the value of the collateral property. Lenders use LTV to assess risk in a loan. Typically, higher LTV is seen as higher risk because there is less equity “cushion” for the lender if the borrower defaults.
The PeerStreet community, just like the communities it strives to serve, is highly dynamic, unique, and intent on nurturing the success of its employees, clients, and the broader industry.
PeerStreet loans are attractive to all types of real estate investors, whether they are borrowing to do deals and need relatively short-term loans, from six to 24 months, or are interested in making private loans with their own money. The company also offers an “automated investing” service that will automat- ically submit orders on loans up to a specified investment amount whenever a loan that meets a private lender’s cri- teria enters the system. AMAGIC COMBINATION: INTENSE SCRUTINYAND LOCAL EXPERTISE For lenders who want to personally evaluate risk and make loans rather than rely on PeerStreet’s automated system, Johnson and Crosby believe the platform’s dedication to truth and transparency on all sides of the lending
tors; funding an inherently bad deal is a disservice to the borrower as well.” PeerStreet’s in-house team of cross-industry experts follows each loan from start to finish, making sure that investors’ interests are protected at every stage of the process from under- writing to pay-off or, on rare occasions, default and foreclosure. The combination of live, breathing expertise – more than 97 years’ in real estate, 52 in law, and 12 in regulatory, the co-founders pointed out proudly – and the insight provided by the technological platform maximizes PeerStreet’s ability to identify loans that are a good fit for mem- bers and that are most likely to yield fruit. PeerStreet’s large and diverse team yields big benefits not only when under- writing loans at the start of a project, but also when it comes to dealing with what other companies might simply write off as disasters [see sidebar]. Thanks to the
equation is crucial. They are willing to ask hard questions and read a lot of fine print in order to make sure that both a borrower and lender are qualified to do the deals in which they are invested. “I think a lot of real estate investors and private lenders that get into the space do not realize the number of factors involved in the real estate mortgage business, from underwriting the economics and risk to proper legal review and documentation,” said Johnson. He explained the PeerStreet system hinges on a multi-layered vetting process that evaluates not just the physical real estate and the investors borrowing to fund their projects, but the lenders making loans as well. “There are certain operators out there, both online and offline, that do not take underwriting and due diligence as seriously as they should,” added Johnson. “That is not just a potential risk for a private lender and their inves-
22 | think realty magazine :: october 2017
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