The table below summarizes costs of a hypothetical foreclose using the case we have been following throughout the book.
Table: Summary of Project Costs
Summary of Project Costs
|After repair value||As is value||Repairs||Our Contract Price (purchase price)||Amount of Private Funds Lent||LTV|
As you can see from the table, the project did not exceed the 70% LTV and thus the Private Lender is shielded against depreciation and in the event of default has more value in the collateral than in the loan. The table below takes this same example and illustrates a worst-case scenario in which the borrower defaults without doing the renovation.
Table: If Borrower Defaults
Worst Case Scenario If Borrower Defaults
|Lost Interest 6 mt @8%||$3,200|
|Total Investor Costs||$96,000|
|Fire Sale Price||$130,000|
|Profit to Private Lender||$34,000|
In the Table: If Borrower Defaults, without doing the renovation, the Lender instantly redeems the $80,000 repair funds because these funds remained unclaimed the Real Estate Investor’s escrow account awaiting “Completion of Construction” documentation for disbursement. In the middle column of the table the total cost to the Private Investor are shown, the remaining balance of the Note, foreclosure fees, realtor resale fees, and lost interest. In this example, the property sells rapidly at a firehouse price of $130,000 leaving the Private Lender a profit of $34,000.
Well-collateralized Private Investment with low LTVs make for sound investment vehicles. Stocks, bonds, CDs, Money Market, and Savings do not offer these same advantages.
What happens if the Borrower dies?
Life is uncertain and real estate investors can die before the completion of a project. The best protection for the Private Investor is real estate life insurance. It is acceptable for the Private Investor to require proof of adequate life Insurance coverage from the borrower before funding a loan.