[00:00:00] Speaker A: Welcome, listeners. You're listening to the Deeds in the Desert, where real estate investors tune in for the latest news.
[00:00:08] Speaker B: Welcome to a new episode of Deeds in the Desert. I'm your host, Ms. C. Bethany, Chief compliance officer with Ignite Funding. And here across from me is Pat Vassar, Director of underwriting. We are going to talk about credit worthiness and collateral today. Pat, so let's start with the basics. When you hear credit worthiness and collateral, what do you what comes to mind in our world of private lending?
[00:00:32] Speaker C: Well, first, the hairs on my arms stand up because that's really the end all be all of private lending. That's the number one most important thing and the hundredth most important thing and everything in between. That is private lending. Once you've mastered those two, you've got it under control. So what comes to mind is our industry as a whole. Really?
[00:00:50] Speaker B: Yeah, yeah. So why is this topic so important for our investors to understand?
[00:00:57] Speaker C: Well, there's really two main components within hard money lending, really. We have an asymmetric risk when it comes to lending. We don't get any upside. We don't get any of the benefits of a project that goes extremely well and they triple their money. But we also limit our losses. Right. We're in a lower loan to value than the equity position is. And so we're trying to mitigate our risk, protect the downside. And under that process, we have to look at two major components, the two most important components of what makes a successful deal, and that is the collateral that our loan is secured by and the borrower. What type of creditworthiness does that borrower have from past credit, his current financials and future obligations?
[00:01:38] Speaker B: Well, that makes sense. And at ignite how early in the process, you said it's everything. But how early in the process do you start looking at that and the collateral? When somebody requests a loan, the first.
[00:01:51] Speaker C: Conversation we have, the first time we would look at a project, that is the first thing we do is look at the collateral and the borrower. Now, the order of operations is somewhat interchangeable. It depends on what information we're given originally.
But you know, they're looked at at the onset of any deal and throughout the entire process of any deal.
[00:02:12] Speaker B: Yeah.
So how would you describe the relationship between the borrower's financials and the, you know, collateral they're bringing to the table?
[00:02:22] Speaker C: Well, they kind of act in two different capacities. The collateral is its standalone value. It is what is the property, what is it today, what is it going to be tomorrow, and ultimately, what will it be once they put in money to it or you know, infrastructure is brought to the side or whatever the case may be, some sort of value add. So the collateral is the project, the credit worthiness is the borrower. Under the collateral side of things, we will look at what is the value now and what is the value in the future. What are the odds of the property going according to plan, whether that's according to the timeline, according to budget, making sure they're on budget and on time.
Because at the end of the day the interest rate doesn't stop, it doesn't matter what kind of slowdowns they have. Our investors are continuing to collect their double digit rate of return. So the onus is really on the borrower to make sure the project goes according to plan.
So on the collateral side of things, we will look at that and then on the credit worthiness of the borrower, we will look at what they've done with, with credit in the past. The best way to look at that is look at past projects, maybe get references from past deals. And maybe most importantly is looking at their credit report, their credit score that shows in today's information what has happened over the past several years of how they were able to manage debt, how were they able to pay off their debt or how were they with their revolving lines of credit, were they on time, were they late, did they pay them off soon, what was it?
[00:03:54] Speaker B: So very similar to a bank, but I know we're quite different than a bank, so can you talk about that?
[00:04:00] Speaker C: Absolutely. And really the differentiation is where we spend most of our time, right? Those we as we talked about in the onset, collateral and credit worthiness are the utmost importance of a deal. Those are the two most important pieces of a project or of a loan. So banks, hard money, lenders, unsophisticated, sophisticated, whatever you want to call it, is all under the same umbrella, looking at the two same things. However, where we differentiate ourselves is we spend about 80% of our time underwriting the collateral and 20% of our time underwriting the borrower. And the reason behind it is at the end of the day, if they stop paying, we can foreclose on the collateral, we can't foreclose on the borrower.
[00:04:41] Speaker B: Yeah, something you say all the time.
[00:04:42] Speaker C: That's right. And because of that we want to make sure that collateral has enough equity into it, some imputed equity, where if we foreclose we can sell it and recoup our potential losses.
[00:04:52] Speaker B: Great. So with that, what is it that you're really looking at and honing in on when you're looking at a borrower's credit.
[00:05:00] Speaker C: So the credit is mostly done in backward looking terms. Right. So when you get a credit score that doesn't tell you about your future, that tells you about what's happened in the past. So we lean on that of what they've done in the past to have kind of a prognosis of how they're going to treat credit in the future. We will also look at their current outstanding debts when those loans mature, how much is their monthly payment to make sure they have the capacity to lend. We they have the capacity to take on additional debt by our U.S. lending to them. So we'll make sure they have that capacity within the credit worthiness of that particular borrower.
[00:05:37] Speaker B: Okay, that totally makes sense. And so what you're saying, if I'm understanding correctly, is that, you know, you're looking at all of those things just like a bank would, but that at the end of the day you can foreclose on the collateral. So the collateral has a higher weight in your analysis, right?
[00:05:55] Speaker C: Absolutely. You know, as you know better than most as part of the investment committee here at Ignite Funding, we look at everything we possibly can. Everything is important, but some things matter more than others. And because of that we put more emphasis on certain items. One of those items is the collateral. We put more emphasis on the project than we do on the borrower because we can foreclose on it. And so although we will look at the creditworthiness, past, present and future of the borrower, it's not as important as the overall viability of the project loan to value the project, location of the project, everything to do with the project itself.
[00:06:34] Speaker B: Well, I ask that because we get that question a lot in our client services team. Right.
What would you say is the biggest misconception that investors have when they are doing their own due diligence on these loans and they're looking at things like the borrower's credit report.
[00:06:50] Speaker C: You know, the misconception, I think is derived from just decades of being told what the banks are doing is the right way and it's the only way to do it. And because of that, we're kind of ingrained as an everyday citizen here in the United States of saying we should underwrite that borrower. We need to make sure that they have good credit. What is their credit score? If they have a good credit score today, that means they're going to be good in the future. And that means we can lend them money.
We don't take that approach because it is better for us as a lender to be able to foreclose on the valuable part, which is the collateral, not the individual entity. So I think a lot of the misconception is derived from generations of knowledge thinking that the banker hours the big almighty bank.
When you get a loan, you go to the bank. Everything's about the banker in this perceived.
[00:07:41] Speaker B: If that's what they're doing, that's what everybody should do.
[00:07:44] Speaker C: Absolutely. And, you know, there's. There's more. One way. More than one way to skin a cat. And I'm not recommending that, by the way.
[00:07:50] Speaker B: But if you PETA, don't come after us.
[00:07:53] Speaker C: That's right. If you do take a different outlook and approach to things, you might find a better outcome. And I believe we have.
[00:07:59] Speaker B: Okay, so somebody new to real estate, borrowing or investing, what is the best place that they can start to learn about how these two work together and maybe think outside the box?
Outside the bank.
[00:08:14] Speaker C: Outside the bank. Great way to put it, right? Think outside of the bank.
[00:08:16] Speaker B: I come up with some. Some of these sometimes.
[00:08:19] Speaker C: That's right. One way to do it is listen to a podcast like this that leans in on some of the information you won't hear talking to your average day Joe. Another way to do it is looking to other podcasts, other resources, maybe even go on to our website. We write white papers on the subject. We have numerous of them available on our website right now, and so do plenty other lenders, whether that's on the hard money side, the private money side, the capital markets side of things. You know, there's a lot under this umbrella of private money.
[00:08:54] Speaker B: Absolutely. Okay, well, any final thoughts on navigating the lending market today?
[00:09:00] Speaker C: You know, think outside the bank.
[00:09:02] Speaker B: Think outside the bank. It's going to.
[00:09:04] Speaker C: It will. I like it. Think outside the bank. It leads to better opportunities, better risk profiles, and better investments overall. And because of that, I would highly recommend thinking outside of the box or outside of the bank when evaluating where and when and how to lend your money.
[00:09:20] Speaker B: Sounds great. Thanks so much.
[00:09:22] Speaker C: Thank you.
[00:09:25] Speaker D: What are you guys doing?
[00:09:27] Speaker C: Just talking.
[00:09:28] Speaker D: Are you on a podcast? No.
[00:09:30] Speaker C: No, not anymore.
[00:09:31] Speaker D: No. Is it live?
[00:09:34] Speaker C: Oh, it is live.
[00:09:35] Speaker D: Okay, good.
[00:09:36] Speaker C: Oh, well, that worked out.
[00:09:37] Speaker D: What are you guys up to?
[00:09:39] Speaker B: Just talking.
[00:09:40] Speaker D: About what?
[00:09:41] Speaker B: Credit, collateral, all things Vassar.
[00:09:45] Speaker D: Oh, this is the Vassar show? Yeah. Yeah, it usually is around here, isn't it? You're talking about credit.
[00:09:51] Speaker C: Credit and collateral, how they interact, why it matters.
[00:09:56] Speaker D: So do we care if our borrowers.
[00:09:57] Speaker C: Have bad Credit, it's part of the underwriting process. It does matter, but it's not the end all, be all.
[00:10:03] Speaker D: What's a good credit score?
[00:10:05] Speaker C: It depends on who you talk to. If you talk to a bank, their underwriting criteria will say anything lower than a 760, 780, 720, depending on where you go matters. For us, it's not the end all, be all. If a borrower comes to us with a 600 credit score score and a 10% loan to value, what's better? That deal or something at 100% loan to value with somebody with a perfect credit score?
[00:10:29] Speaker D: Yeah.
[00:10:29] Speaker C: You do the math.
[00:10:30] Speaker D: Agree. I totally agree. What's the highest credit score we can.
[00:10:33] Speaker C: Have that you can have?
[00:10:35] Speaker D: Yeah.
[00:10:35] Speaker C: Depends on what underwriting model you utilize. 800.
[00:10:38] Speaker A: 850.
[00:10:39] Speaker B: That's right. 900.
[00:10:40] Speaker C: Some 900 now. Yeah. There's new models that are coming out and I heard they're coming out with Vantage four coming up here pretty soon, which. Who knows what skill that's gonna be? Cause I personally don't. Highest we've seen here, eight hundreds, have we? Yeah, I don't really remember off the top of my head.
[00:10:56] Speaker D: Do we use all three credit agencies during credit review? We sure do take average, average of three usually, yeah. What if they have really, really bad credit?
[00:11:09] Speaker C: Well, then they better have a really, really good deal.
[00:11:14] Speaker D: Because it happens. Right. We see some of those out there and our investors see it and they're like, what are you guys doing? Why would you do that?
Which is probably why you guys are talking a little bit about this.
[00:11:24] Speaker C: Absolutely. Yeah. If they have bad credit, it happens. Doesn't mean we're not going to do the deal. It just means everything else better be really, really good.
[00:11:31] Speaker D: Yeah.
What if it shows like bankruptcy or something?
[00:11:35] Speaker C: It's a possibility.
[00:11:36] Speaker D: Or liens or something along those lines.
[00:11:39] Speaker C: Yeah. So from the bankruptcy, what do you do then?
[00:11:42] Speaker D: Other action that you take?
[00:11:43] Speaker C: Yeah. So from the bankruptcy side of things, you know, we went through this period of time in our history known as the Great Financial Crisis. We did that. GFC time frame for any borrower in real estate. 99% of them went through a bankruptcy. If they were in real estate during that time, chances are they went through bankruptcy. So chances are our borrowers will have a bankruptcy on their record. If they were involved in real estate prior to the gfc, if there is.
[00:12:11] Speaker D: Not just borrowers, individuals.
This was a thing.
[00:12:15] Speaker C: Yes, it was a thing, but much more so on the real estate side of things, because that's kind of the major Cause if their BK was post the gfc, we'll take that with a bigger grain of salt. We'll need to know exactly why, when and how that transpired. As far as liens and judgments are concerned, we will obviously look into those anytime they arise. Are they concerned? Absolutely. Will they need to be resolved potentially, will that need to be happen before we lend money? In some cases, absolutely.
[00:12:44] Speaker D: Have you ever asked borrowers to get those resolved before we lend?
[00:12:47] Speaker C: Absolutely.
[00:12:48] Speaker D: Okay.
[00:12:48] Speaker C: Not in all cases.
That doesn't mean we won't lend to borrowers that have them. But for the most part, yes, we.
[00:12:55] Speaker D: Turn that stone a little bit.
What's going on here?
[00:12:58] Speaker C: Yeah. Because as we talked about, we'll look at, look at it more holistically. Right. That is one negative detriment to the project or to the viability of the asset. But it's not the end all be all.
[00:13:09] Speaker D: Could their lien or their judgment affect the collateral?
[00:13:12] Speaker C: Absolutely. It could affect the priority.
Who is in first lien position. At the end of the day, that's what we do is first lien position. If we can't get in the first lien position, we will probably end up not doing the deal and just walking away.
[00:13:26] Speaker D: Yep. And then we provide these credit reports to our investors.
[00:13:30] Speaker B: Yes.
[00:13:31] Speaker D: Why do we do that?
[00:13:33] Speaker B: Well, one, they want it. Two, we're required to.
[00:13:37] Speaker D: Yeah.
[00:13:38] Speaker B: And so, you know, we, we check that box. But we, you know, in client services, we have clients that really analyze those reports. And so that's a lot of where these questions are coming from is, well, borrower has a 600 credit score, why are you lending?
And so, you know, like Pat says, we're lending on the collateral, not the person.
[00:13:59] Speaker D: Yeah, no, totally makes sense.
[00:14:01] Speaker B: Yeah.
[00:14:01] Speaker D: It's kind of crazy that we provide them though.
[00:14:04] Speaker C: Redacted versions. Redacted versus true Social Security numbers, personal addresses or children's names.
[00:14:11] Speaker B: Children's names, yeah.
[00:14:12] Speaker C: Minus that, they'll get most of the pertinent information that will help them determine if this is actually a credit worthy borrower.
[00:14:19] Speaker D: Yeah.
[00:14:20] Speaker B: We send out tax returns. Too.
[00:14:21] Speaker D: True.
[00:14:22] Speaker C: With the same redacted information.
[00:14:23] Speaker B: Exactly.
[00:14:25] Speaker D: When do we run the credit reports?
Onset.
[00:14:30] Speaker C: Before we fund a new loan. If it is a repeat borrower, it'll be done at least once a year.
[00:14:35] Speaker B: Right.
[00:14:35] Speaker D: Okay. All right.
[00:14:37] Speaker B: And yes, absolutely. Before we fund. Every single time. Because clients have to be able to, to look at that information prior to going on a loan.
[00:14:44] Speaker D: Yep. How many investors have ever pulled off of a loan because of a credit score?
[00:14:49] Speaker B: There have been some. It's Very rare. But there have been a few that have, despite, you know, probably Pat getting on the phone with them even to talk them, you know, through that, they just don't feel comfortable for whatever reason. That's okay.
[00:15:04] Speaker D: Yeah, it's okay.
[00:15:05] Speaker C: And that's kind of the beauty of the product though, isn't it? For whatever reason you choose.
[00:15:10] Speaker D: Yeah. You're not comfortable with it. No big deal.
[00:15:12] Speaker C: If you don't like the area, don't like a property type, don't like whatever it is, don't go on it, go on something else.
[00:15:18] Speaker B: Yeah, plenty of options, right?
[00:15:20] Speaker C: That's right.
[00:15:21] Speaker D: In general though, Pat, do our borrowers have a decent credit score?
[00:15:26] Speaker C: For the most part, Yes. I, I Misty, what would you say our average credit score is?
[00:15:31] Speaker B: I would say low 700s, low 700.
[00:15:33] Speaker C: So it's, you know, it's not the most upper echelon of credit scores, but it's definitely not somebody that's running run from their creditors.
[00:15:41] Speaker D: Yeah.
[00:15:42] Speaker C: It is somebody that has done and performed well with credit in the past, has the capacity to obtain additional credit and shown the ability to utilize that credit wisely.
[00:15:51] Speaker D: And I think that's important because when we talk about this, I think it initially comes across as oh, well, here's why we're justifying a 400 score.
We're not justifying 400 scores here. We're just saying, you know, it's part of, it's part of our review.
[00:16:05] Speaker B: Well, and don't you think that it's part and parcel too to the business that they're in? So unlike, you know, us as individuals that maybe we apply for credit, you know, we buy a house or a car every couple years, whatever the case is, these borrowers are regularly applying for.
[00:16:22] Speaker C: Credit and yeah, so it's a self perpetuating prophecy that their credit scores are going to be going down because of that. One of the interesting parts about credit is one of the components of your credit score is how many inquiries have you had on your credit? As Misty Ding, ding, ding, ding, ding.
[00:16:40] Speaker D: Ding, ding, ding ding ding.
[00:16:41] Speaker C: Our borrowers are applying for credit all the time. So their credit inquiries in the past 24 months are usually in the double digits.
[00:16:48] Speaker D: Yeah.
[00:16:49] Speaker C: That is not rare at all for our borrowers because they're applying for many different loans over many different properties over many different markets. And because of that, even if they've never had a late payment, never had any issue, they will never have a perfect score because of that issue. So it's impossible basically for our borrowers to have perfect scores. Because of that self perpetuating prophecy.
[00:17:10] Speaker D: Absolutely. Kind of crazy.
[00:17:12] Speaker C: Yeah, kind of is.
[00:17:15] Speaker B: And things that people, our investors don't often think about, you know, when they're looking at that because of what, like you said, has been ingrained over the years with banks.
[00:17:23] Speaker D: And I don't know this for sure, but I think it's like 10 points for every inquiry. It's pretty steep.
[00:17:28] Speaker B: It's pretty steep.
[00:17:29] Speaker D: The effects that it has on your credit.
[00:17:33] Speaker B: So in that regard, having a low seven hundreds for our borrowers is probably pretty close to perfect.
[00:17:39] Speaker D: That's a pretty solid score, huh? Interesting.
Well, I appreciate you letting me pop in on this. Just wanted to be a part of the conversation, make sure that investors know that this isn't a scary topic, but something that they have that they can review.
Something different.
[00:17:55] Speaker B: Absolutely.
[00:17:56] Speaker C: Absolutely. One of the pieces to the puzzle.
[00:17:58] Speaker D: Many pieces to the puzzle.
Okay, Outro, Thanks. What do you got?
You can do your outro now. Look at there. Here it comes.
[00:18:07] Speaker B: Thanks for joining us.
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[00:18:13] Speaker A: Thanks for joining us this week on Deeds in the Desert, where short term investments meet investors. We hope you enjoyed the content so much that you share it with all your friends. Who doesn't like learning about passive fixed income, right?
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[00:18:49] Speaker D: It.
