I recently signed up for Groundfloor to help diversify my portfolio. While looking at their available investments. A thought struck me, I am not entirely sure of the difference between a bad & good investment in a debt deal. I generally look for an ARV of 60% or lower & it be in a decent location. However, there are several metrics available on each potential deal. What are some things to look for to help indicate a bad/good deal.
The thing about after repair value is that it can be easily manipulated and look a lot better than it really is with a sloppy appraisal. And some platforms have more of a reputation for this than others.
In my opinion the first thing to start with is at the platform level (or fund level if you're like me and prefer them to the platforms), and look at the uncured default rate. This is the rate of notes that go into foreclosure. Then compare it to the best in class metrics to other platform/funds. This gives you an idea for the quality of the underwriting. Personally I see no reason to invest in anything that is not best in class, but I am a conservative investor so more aggressive investors might feel differently.
Then take a look at the notes themselves. One of the biggest thing to look at is if it is in a judicial or nonjudicial state. A foreclosure in a nonjudicial state is relatively quick and cheap. It's the opposite in a judicial state, which can last a year or more and require a lot of money to litigate. Personally I avoid states without a nonjudicial option.
You also want to make sure everything is first position debt.
Pages can literally be written on how to evaluate debt deals.
Ian offers good advice.
Not to beat it to death as I posted here that I had lost $2k on a Groundfloor deal but, GF advised me that they do not have the borrower personally guarantee the note. Therefore, no way to go after the borrower if the foreclosure sale doesn't cover the debt. On any whole notes I do, I insist on a personal guarantee.
I looked at some of their loans yesterday. One metric that I look at is the ARV compared to the neighborhood values. Some were surprising (mild term). A 220K ARV is a tough sell in a 150K neighborhood.
Groundfloor recently posted an empirical analysis of estimated ARV for all loans that subsequently repaid in 2018.
The data shows that the median predicted value was 4.7% lower than the sales price, while the median appraisal value was 8.6% lower. Empirically speaking, it's not accurate to say the predicted ARVs are "inflated" (appraisals are used as just one input to estimating value).
Raw data for each transaction is available in a public Google Sheet for investors to analyze.
Visit https://blog.groundfloor.com/an-analysis-of-arv-es... for a link to the sheet and more details.
Brian, thanks for sharing your company's data. All part of the CF education process.
@Brian Dally Thank-you for posting this, I'm going to go & read it over.
@Gary Headrick You stated that you insist on a personal guarantee, how do you do that though crowdfunding? Or are you a hard money/private money lender as well. Thanks for pointing out comparing ARV to the neighborhood.
@Ian Ippolito great point on judicial/non-judicial. I did not think about including that. From you experience, which platform do you like? Also, is the uncured default rate something that is published by each platform or is there an exterior source? I agree, I don't plan on doing 2nd position, or any other position for that matter. At least, not right now until i'm more experienced.
@Nathan Patterson , if I were an aggressive investor, then there would be several platforms that I would like.
But I'm a conservative investor and have much stricter underwriting standards (65% LTV or less, states with nonjudicial foreclosure only, etc). So 98% of the notes on the platforms can't meet these standards and there isn't enough volume to handle the amount of money I allocate to hard money loans.
So I personally don't use any platforms but instead invest through hard money loan funds that meet my criteria. These have additional advantages as well. For example, I can be invested into hundreds of notes with a single investment instead of taking on the risk of a single note. Plus, it is a pain with single notes to be constantly having to do due diligence on new notes when they come due every month. I personally am happy to pay an expert (and with years more experience than I have) to do that for me. I am personally invested in BroadMark and Arixa. If you want more info on those, PM me.