registerme
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Post by registerme on Aug 25, 2017 16:16:40 GMT
For a number of reasons I am becoming increasingly nervous of property development loans. Partly as a result of this I thought it might be an interesting exercise if us lenders aggregated our views for "good loans, best practice", and then asked platforms to comment as to why it's too difficult, complex, inappropriate or expensive to meet the benchmark we set. Even if we can't get agreement it might be illuminating..... Assuming that this is a good idea let's start by agreeing the list of problems. Then we can suggest, where practical, solutions. Then we ask for commentary from MoneyThing and Lendy Support etc. Anybody interested in helping with this exercise? To kick things off here are some of my concerns:- 1. RICS valuation reports - a common bugbear with many forumites ( mrclondon , ozboy , masquedefer to name but three have provided much commentary around this subject). a) Too often too obviously performed with the borrower's interests in mind, not those of the lender. b) Too often magically reach a ceiling of 70% LTV. c) Poor (not enough, not comparable enough in terms of type or geography) sales comparison data eg £/sqr ft. d) Carried out remotely (ie no site visit). e) Not enough account taken of the potential for needing a fire sale and / or it turning into a distressed asset, see here for more. f) Occasionally what might be termed "fantasy" valuations. g) Sometimes shoddily prepared (little in the way of proof reading). 2. (With apologies to anybody who works in it....) construction is, unfortunately, both an unreliable and a difficult industry, see this for some interesting commentary. 3. Examples of poor oversight by platforms. a) Readily apparent problems not being communicated with lenders. b) Lack of provision of updates like IMS reports. c) Apparent limited facility to step in and help when things start to go wrong, which leaves the onus on the borrower alone to rectify things - see 4. below. 4. I'm not sure that risks and incentives are aligned well enough. a) Planning permission can result in a magical uplift in the value of the proposal, "equity" almost appearing out of thin air. And if this "hope value" doesn't appear.....? And even if it does it often allows for a required increase in the size of the lending facility to complete the project. b) Are interest payments still tax deductible? c) SPV structures limiting liability to too great an extent? d) Too low a barrier to entry, any old Tom, Dick or Harriet can bash up a house on a plot of land. e) If all ends well then great, but does the combination of 2, 3c, 4c and 4d make it too easy for the developer to just wash their hands of a project and walk away? |
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Post by mrclondon on Aug 25, 2017 18:50:10 GMT
A detailed, and thought provoking post registerme , and your headline conclusion regarding overall risk mirrors my own thoughts. A few more observations to throw into the mix: a. the companies house practise of creating a new director record for the same individual at multiple addresses (even before the massaging of the spelling of names adds even more records) makes it very hard to see the full extent of the past "creativity" of some of the borrowers; and it is inevitable some past history of the borrowers will escape the platform's due diligence. b. we probably have too many platforms targeting the same relatively small pool of "sub-prime" borrowers, and creating a downward pressure on rates (and possibly an increase in risk threshold before the answer is 'no'). Most of the proposals we see on COL/FS/L/MT (and probably ABL, but I'm not a lender there) are to individuals / companies who simply would be unable to secure finance on comparable terms from mainstream financiers (there are virtually no recognisable names of mainstream or even chanellenger banks holding charges against many of the companies associated with borrowers we see). c. some/many/most (?) of the platforms are at face value relatively inexperienced in the recovery process, and some of the platforms may simply be unaware that a 70% LTV loan when subject to a firesale situation is more likely than not to result in a capital loss (unless the asset is a single mainstream residential property). |
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shimself
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Post by shimself on Aug 25, 2017 19:15:20 GMT
Just chipping in that we often don't get told how much the land was bought for and when. Personally I think RICS should put it on the checklist
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DeafEater
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Post by DeafEater on Aug 25, 2017 19:29:10 GMT
I agree with all of the above but I would also like to know the name of the borrower (be it a company or an individual). Anonymity is fine for pawn loans but I can't see any justification for it in business/property loans. When doing my DD I want to do just as much research into the borrower(s) as I do into the specific proposition on offer. Sometimes it isn't too difficult to work out who it is but why should I have to go digging? AC name them but MT and Col do not. If identity isn't disclosed by the platform, the educated guesswork required to reveal it can sometimes lead to a wrong conclusion and consequently the wrong lending decision.
I'm equally fastidious when it comes to assessing the character of the various Nigerian princesses that contact me with their urgent requirement to divest themselves of $100,000,000. It turns out that quite a lot of them are crooks.
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ozboy
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Post by ozboy on Aug 25, 2017 21:00:58 GMT
A detailed, and thought provoking post registerme , and your headline conclusion regarding overall risk mirrors my own thoughts. A few more observations to throw into the mix: a. the companies house practise of creating a new director record for the same individual at multiple addresses (even before the massaging of the spelling of names adds even more records) makes it very hard to see the full extent of the past "creativity" of some of the borrowers; and it is inevitable some past history of the borrowers will escape the platform's due diligence. b. we probably have too many platforms targeting the same relatively small pool of "sub-prime" borrowers, and creating a downward pressure on rates (and possibly an increase in risk threshold before the answer is 'no'). Most of the proposals we see on COL/FS/L/MT (and probably ABL, but I'm not a lender there) are to individuals / companies who simply would be unable to secure finance on comparable terms from mainstream financiers (there are virtually no recognisable names of mainstream or even chanellenger banks holding charges against many of the companies associated with borrowers we see). c. some/many/most (?) of the platforms are at face value relatively inexperienced in the recovery process, and some of the platforms may simply be unaware that a 70% LTV loan when subject to a firesale situation is more likely than not to result in a capital loss (unless the asset is a single mainstream residential property). You're a sharp cookie mrclondon and I can't believe you have said that. I would argue that they're very, VERY aware, all of them, it's just not their money at risk innit?!!
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macq
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Post by macq on Aug 25, 2017 21:08:19 GMT
I agree with all of the above but I would also like to know the name of the borrower (be it a company or an individual). Anonymity is fine for pawn loans but I can't see any justification for it in business/property loans. When doing my DD I want to do just as much research into the borrower(s) as I do into the specific proposition on offer. Sometimes it isn't too difficult to work out who it is but why should I have to go digging? AC name them but MT and Col do not. If identity isn't disclosed by the platform, the educated guesswork required to reveal it can sometimes lead to a wrong conclusion and consequently the wrong lending decision. I'm equally fastidious when it comes to assessing the character of the various Nigerian princesses that contact me with their urgent requirement to divest themselves of $100,000,000. It turns out that quite a lot of them are crooks. if only a quite a lot of them are crooks does that mean you married the princesses who was genuine? and why are you doing p2p 
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ozboy
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Post by ozboy on Aug 25, 2017 21:15:51 GMT
For a number of reasons I am becoming increasingly nervous of property development loans. Partly as a result of this I thought it might be an interesting exercise if us lenders aggregated our views for "good loans, best practice", and then asked platforms to comment as to why it's too difficult, complex, inappropriate or expensive to meet the benchmark we set. Even if we can't get agreement it might be illuminating..... Assuming that this is a good idea let's start by agreeing the list of problems. Then we can suggest, where practical, solutions. Then we ask for commentary from MoneyThing and Lendy Support etc. Anybody interested in helping with this exercise? To kick things off here are some of my concerns:- 1. RICS valuation reports - a common bugbear with many forumites ( mrclondon , ozboy , masquedefer to name but three have provided much commentary around this subject). a) Too often too obviously performed with the borrower's interests in mind, not those of the lender. b) Too often magically reach a ceiling of 70% LTV. c) Poor (not enough, not comparable enough in terms of type or geography) sales comparison data eg £/sqr ft. d) Carried out remotely (ie no site visit). e) Not enough account taken of the potential for needing a fire sale and / or it turning into a distressed asset, see here for more. f) Occasionally what might be termed "fantasy" valuations. g) Sometimes shoddily prepared (little in the way of proof reading). 2. (With apologies to anybody who works in it....) construction is, unfortunately, both an unreliable and a difficult industry, see this for some interesting commentary. 3. Examples of poor oversight by platforms. a) Readily apparent problems not being communicated with lenders. b) Lack of provision of updates like IMS reports. c) Apparent limited facility to step in and help when things start to go wrong, which leaves the onus on the borrower alone to rectify things - see 4. below. 4. I'm not sure that risks and incentives are aligned well enough. a) Planning permission can result in a magical uplift in the value of the proposal, "equity" almost appearing out of thin air. And if this "hope value" doesn't appear.....? And even if it does it often allows for a required increase in the size of the lending facility to complete the project. b) Are interest payments still tax deductible? c) SPV structures limiting liability to too great an extent? d) Too low a barrier to entry, any old Tom, Dick or Harriet can bash up a house on a plot of land. e) If all ends well then great, but does the combination of 2, 3c, 4c and 4d make it too easy for the developer to just wash their hands of a project and walk away? Excellent, excellent, EXCELLENT registerme, good job. This sort of initiative will hopefully bring power back to the Investors, where it should have been all along of course, and not with Borrowers, where it's been for far too long. Platforms' responses (or lack of) will be revealing and arguably a reasonable guide to investing. I think I have crystal balls because I reckon I can answer with 80/85% accuracy what each of the 9 Platforms I'm with are likely to say. 
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macq
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Post by macq on Aug 25, 2017 21:22:43 GMT
A detailed, and thought provoking post registerme , and your headline conclusion regarding overall risk mirrors my own thoughts. A few more observations to throw into the mix: a. the companies house practise of creating a new director record for the same individual at multiple addresses (even before the massaging of the spelling of names adds even more records) makes it very hard to see the full extent of the past "creativity" of some of the borrowers; and it is inevitable some past history of the borrowers will escape the platform's due diligence. b. we probably have too many platforms targeting the same relatively small pool of "sub-prime" borrowers, and creating a downward pressure on rates (and possibly an increase in risk threshold before the answer is 'no'). Most of the proposals we see on COL/FS/L/MT (and probably ABL, but I'm not a lender there) are to individuals / companies who simply would be unable to secure finance on comparable terms from mainstream financiers (there are virtually no recognisable names of mainstream or even chanellenger banks holding charges against many of the companies associated with borrowers we see). c. some/many/most (?) of the platforms are at face value relatively inexperienced in the recovery process, and some of the platforms may simply be unaware that a 70% LTV loan when subject to a firesale situation is more likely than not to result in a capital loss (unless the asset is a single mainstream residential property). think point B. is very pertinent not only to property development but most of P2P as its what gave the risk/reward ratio in the first place and how the companies grew offering loans that others would not.What is becoming clear is that some borrowers are becoming just as sharp to the advantages of this form of lending as some of the people on the forum(they may even read it!)and they probably already knew a lot of the little tricks in the first place.There's always been dodgy dealings in this type of market hence all the films & tv that use it as a backdrop
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registerme
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Post by registerme on Aug 25, 2017 21:29:00 GMT
I'm glad you're on-board ozboy, so, what are your issues, critique, observations etc (at least the ones I don't know about)  ? |
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registerme
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Post by registerme on Aug 25, 2017 21:30:11 GMT
Forgive me, but.... "Let's make lending great again"  . |
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ozboy
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Post by ozboy on Aug 25, 2017 21:33:21 GMT
I'm glad you're on-board ozboy , so, what are your issues, critique, observations etc (at least the ones I don't know about) ? Ha Ha! tbh you've covered everything I can think of registerme, well at least what I can think of at 22:30 Friday night after a long & hard day. My thoughts etc are of course very well known on here but if I come up with a pearler or two after a good night's sleep, I'll let yer know.
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DeafEater
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Post by DeafEater on Aug 25, 2017 21:33:47 GMT
if only a quite a lot of them are crooks does that mean you married the princesses who was genuine? and why are you doing p2p I didn't want to make a sweeping judgement regarding the moral rectitude of ALL Nigerian royalty, but I believe the current Mrs DeafEater has no reason to be any more nervous than P2P already makes her.
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star dust
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Post by star dust on Aug 25, 2017 22:00:44 GMT
There isn’t much not to agree with so far, but just to add that one of my top concerns is borrowers and their inter-relations and cross platform connections. It would of course help if the platforms named them, sometimes it’s easy to find out, sometimes much harder, but the connections are what I’d especially like to know about because as mrclondon says I think we’re sometimes fishing in a rather small pool containing a lack of diversity. Like many I am sure I don’t take sufficient notice of loans I’m not intending to lend on and I don’t lend on that many platforms. It’s only through the forum that I’ve found out about a number of cross-connected loans and indeed cross-connected borrowers. But I am also aware my knowledge isn’t that complete and I sometimes fail to keep track of things. I don’t know if there is something we (as a Forum) could do to keep adding to and updating this information *. It is actually something that might even benefit Platforms’ as there has been an example this week of a borrower seemingly trying to obtain a loan from two Platforms on the same asset, although admittedly not a property asset, it seemed the Platform’s were not at first aware of this. The other thing that has also been mentioned is recoveries and that process. It may be somewhat unfair or difficult to compare platforms, but iirc it was one of AC’s early raison d’être’s – their recovery expertise. I know they’ve had a few bad ones, and someone will correct me pretty sharpish if I’m wrong, but it seems to me their recoveries on property backed loans haven’t been too bad overall although they have had a lot of defaults. Lendy have informed us in their update today that they have strengthened their expertise in this area recently too. Are there any standards needed here, should we expect platforms to employ or contract with individuals or firms with specific professional qualifications and experience? * And yes I do know we can’t name them here but it’s relatively easy to get the message out without doing so. |
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macq
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Post by macq on Aug 25, 2017 22:22:16 GMT
as mentioned by others you would have to agree with all that has been said so far(may be platforms & borrowers would disagree)On the point of trying to point out in some way people who are borrowing across platforms would there be a sub section for company directors who are wives,children,cousins twice removed & best mates etc who hold the post for a year or run a subsidiary company or any of the other little tricks that make doing DD such a pain |
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snowmobile
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Post by snowmobile on Aug 25, 2017 23:11:00 GMT
as mentioned by others you would have to agree with all that has been said so far(may be platforms & borrowers would disagree)On the point of trying to point out in some way people who are borrowing across platforms would there be a sub section for company directors who are wives,children,cousins twice removed & best mates etc who hold the post for a year or run a subsidiary company or any of the other little tricks that make doing DD such a pain Indeed. The web can be so intricate that I'm surprised they can keep track of it themselves 
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