When determining what Trust Deed investment to invest in, the single most important aspect is the collateral that is backing the loan. The only security an investor has in the event of a default is the real estate itself. Real estate collateral operates in a similar fashion to that of an auto loan. If the auto finance company lends to the consumer and the consumer defaults on the loan, the finance company takes the collateral back. The only true recourse an investor has is the collateral, this is why Ignite Funding is hypersensitive to the current market valuation and future market valuation of real estate.
Before Ignite Funding determines the final loan amount of an investment, we have to determine the value of the real estate.
What is value and how is it calculated?
Value is the most subjective part of the equation. At Ignite Funding, valuation can be determined based on four different sources as determined by our regulators in the Mortgage Lending Division.
- The first is the purchase price of the property. If the borrower is under contract to acquire the property, the purchase price would become the value.
- The second is the assessed value, which is what the County Assessor’s Office values the property. This assessed value is what property taxes are based on.
- The third is an actual appraisal of the property. At the borrower’s expense, Ignite Funding can require an appraisal to be prepared for the collateral.
- The last option is a Broker Opinion of Value (BOV). A BOV is what a real estate broker determines as the value of the real estate, much the same way a listing price is determined.
At Ignite Funding, we exercise a variety of the value methodologies listed above along with extensive research conducted on the property, which includes, but is not limited to a property site visit before an investment is offered to our investors.
When is it appropriate to use an Appraisal Waiver and why?
Due to regulatory requirements, Ignite Funding is only allowed to define the loan-to-value (LTV) when marketing investments to its investors if we have one of four different types of value methodologies; contracted value, assessed value, appraised value, or a broker’s opinion of value.
In many instances Ignite Funding may forgo one of these four specified value methodologies only when we are confident in the value determined by our own metrics and previous investments done in the area or community.
For example, some of our construction loans are pre-sold, which means the borrower has a contract with an end-user to buy the home once the construction is completed. Obtaining an appraisal would add unnecessary cost and delay to the borrower. Since a pre-sold contract is not one of the allowable LTV methodologies, Ignite Funding cannot advertise the investment in this fashion and is therefore required to obtain an appraisal waiver from its investor(s).
Another example is when Ignite Funding does multiple construction loans in the same community. It is customary that a new community will first construct model homes of various size and floor plans and then build out the community. As the borrower builds and sells homes in the community Ignite Funding can predict, with a fairly high level of certainty the value of the real estate asset. Again, obtaining an appraisal would add unnecessary cost and delay to the borrower, therefore requiring an appraisal waiver from investor(s).
The next time you see an investment at Ignite Funding offered with an Appraisal Waiver, chances are the scenarios above will apply. Whether the investment has an LTV or an Appraisal Waiver, the diligence conducted during the underwriting process is held to the same high standard.