By: Tony Zerucha, Bankless Times
The President and CEO of a leading residential real estate investment lender says there are unique challenges in growing a real estate-focused platform into a national entity.
Jeff Ball said underwriting real estate transactions is a challenge for platforms because no one has created the methodology and technology to perform remote due diligence.
In contrast, with unsecured consumer lending credit scores are predictive of consumer behavior regardless of where the applicant lives, he explained.
“The hard part of lending in real estate, especially remotely, is the challenge posed with assessing the property’s condition and the area it is in,” Mr. Ball said.
This problem is especially acute in certain areas of major cities where revitalization efforts are taking place. In areas of Baltimore and Philadelphia, for example, some blocks can feature five or six houses which have been redeveloped and which are in good shape. A half-block down the street, someone may want to renovate a house between an empty lot and a burned-out home.
Tough to see that when you are working several states away.
One step Visio takes is to verify the borrower’s experience level, Mr. Ball said. If they have previously borrowed for several successful “fix and flips,” this says the borrower has at least some idea of the work involved and how much profit those efforts can reasonably expect to generate.
Another challenge for real estate lending platforms is finding enough quality deals they can cost effectively perform due diligence on and present to investors, Mr. Ball said.
This problem is especially acute for remote lenders, Mr. Ball said.
“The risk for (remote) platforms is they get negatively selected,” he explained. “If you are not the local guy you can get taken because if a local lender liked the deal they would have done it.”
Platforms can attract better quality deals by providing access to flexible and cheaper capital that gives them a cost advantage, Mr. Ball said.
During and immediately following the mortgage crisis, many people challenged a company’s ability to foreclose on a property. As loans were packaged and repackaged, it was hard to track ownership and keep proper files.
“Collateral agents hold the original loan files,” Mr. Ball said.
More attention is being paid to how the different lending platforms will react when the market hits a down part of the cycle. Mr. Ball believes it is sensible to assume those companies which combine decades of industry knowledge with technical expertise will fare better than those whose founders are great with technology but have scant experience in the field.
“Many of these underwriting models have not been tested through down cycles and I believe they are underpricing risk,” Mr. Ball said.
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