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Groundfloor loan with $0 gain

Started by Peter, August 22, 2017, 11:00:00 PM

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jheizer

https://www.groundfloor.us/investments/1207-malbay-drive" class="bbc_link" target="_blank">https://www.groundfloor.us/investments/1207-malbay-drive

After repair value = cost of property + cost of repairs

And they plan to sell it when done.  What am I missing?  Its an A grade too?

Edit: And the purchase price = completed price.  Its almost like they bought it with cash then used groundfloor to pull some money out but for what reason?  I guess just to have more cash on hand for other projects maybe.  LLC was formed 2 weeks before it was bought.



Rude Dude

Had a look at Groundfloor and their offerings. I really think accredited investors would be better off investing in a private mortgage fund or REIT. Fractionalized RE investing offered by online lenders like Groundfloor might sound sexy because of low investment minimums, but it puts investors at a disadvantage vs. traditional RE investments. To wit:

- through the LRO, investors are creditors to Groundfloor and the investors' share of the loan is NOT secured by real estate. You're just making a loan to the platform; your investment is effectively unsecured. Also, investors could have a problem recouping the principal invested if the platform goes sideways
- the loans are not personally guaranteed by the buyer; in the event of a default, the lender has no recourse to the borrower's personal assets such other investment properties. Increases the probability of delinquency and default. Also means that the lender doesn't have any visibility on the owner's personal credit, which is still a hugely important factor in assessing repayment. It's possible that at lot of these borrowers don't have much in the way of outside income or personal assets, but a personal guarantee is oftentimes the only reason borrowers will continue to pay if there's a problem with the subject property
- the borrower doesn't need to produce tax returns or bank statements. Sounds a little like the ninja loans made before the financial crisis.
- Extremely high loan to cost ratios. The lender advertises 90% LTC, but mentioned that the LTC was 95% on a loan that recently defaulted (see the blog post - kudos for the company for being transparent about this)
- the lender occasionally makes junior position loans. Looks like they're mostly rehab loans. While I'm not opposed to 2nd loans, as an investor you'll want to make sure that the first loan has a 70% or lower LTV (of the purchase price). If the borrower has problems with permits, contractors, etc. they may be unable to continue the project and likely default on the first. The lender of the first will foreclose and the holder of the 2nd will be wiped out because the project is in the middle of a rehab and is unsellable - all the protective equity is gone.
- Does Groundfloor's management and u/w team have actual RE lending experience? They very well may, I didn't get the chance to check this out
- Is groundfloor lending nationally? If so, does their u/w team understand the nuances of and have experience lending in the geographies in which they lend? 


Overall, this model is going to appeal more to borrowers who don't have provable income, assets, credit or experience. Also keep in mind that this product will appeal more to borrowers in geographic zones that are more exposed to a correction.

This stuff is not for the faint of heart. Do your homework before investing.


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