When it comes to real estate investing, the secret sauce is due diligence. Every investor must ensure the investment is sound. In essence, you have to weigh the risks against potential returns. Is that investment worth the potential loss for the hope of the promised gain? Enter the underwriting process.
Sharestates’ Underwriting Process
With real estate crowdfunding, due diligence is not performed by the investor himself. Rather, the platform, or the project underwriter, perform due diligence on behalf of all investors. Since Sharestates underwrites its own projects, we’ve developed a 34-point underwriting process that takes into account all the factors a serious real estate investor would consider before investing a project.
Projects may be a rehab project an investor plans to sell after the project is completed or it could be a buy-and-hold rental property. It may be commercial or residential. It may be single-family or multi-family. In some cases, the property involves acquisition plus rehabilitation. This is how Sharestates approaches to risk management on behalf of investors.
3 Real Estate Loan Application Criteria That Must Meet Our Expectations
Sharestates underwrites each project submitted to our platform by borrowers, which we call sponsors. We also vet the sponsors. After all, investors are putting their trust in the sponsor as well as the individual real estate project.
- At first glance, we’re interested in the location. Is a property in a location we are interested in being in? In general, we’d rather invest in a property that needs a lot of work in a neighborhood that is well-kept than vice-versa. That’s because a run-down property in a good neighborhood will hold more value and offer more potential returns than one where crime is high, schools are sub-par, and residents do not have access to shopping, public transportation, or basic infrastructures like water and sewage.
- On the sponsor, we’re looking for experience and track record. We want to know if the sponsor has much experience managing real estate projects, but we also want to know if the sponsor has experience in a specific type of project. If they bring us a commercial property and they’ve never worked on a commercial property before, we want to know if they understand the difference between commercial and residential property investments and can see the project through to the end. Beyond that, a track record is important because even if a sponsor has worked on 50 similar projects before if half of them have failed to produce positive returns, that’s a red flag for underwriting purposes.
- Because the loans we offer are bridge loans, exit strategies are very important. We want to know if a particular loan has the ability to go away after 12 months, which simply means converting into a conventional lending product so our investors can see a return on their investment. If we see no viable exit strategy, that’s a deal killer and nothing else matters.
What Happens If Those 3 Criteria Check Out?
Once we’re satisfied with the project location, the sponsor’s experience, and track record, and we’ve developed a clear exit strategy, we take a look at other pertinent investment criteria. These include:
- Loan-to-Value (LTV) – How much value will the property hold and how much are we willing to lend to obtain that value? In general, our expectations are 65% to 80% LTV.
- Lien Position – Is the sponsor offering a first lien position or mezzanine. We won’t reject anything less than the first lien, but we prefer to be first in line.
- Occupancy – For buy and hold properties, we ask if the property is occupied, which decreases the risk to investors.
- Development Phase – Is the project just getting started or is the investor seeking a loan for completion of a project nearing finish? Cash flows are very important in determining risk and potential returns.
On the borrower side, we check credit score and ensure the borrower is offering a personal guarantee. A project sponsor in the prime category willing to risk his personal assets is a much better risk than a sub-prime borrower with no personal assets. Our goal is to protect investor assets.