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Real Estate Crowdfunding => General Discussion => Topic started by: JohnnyP on March 13, 2017, 11:08:58 PM

Title: Downside for PeerStreet
Post by: JohnnyP on March 13, 2017, 11:08:58 PM
I have been pretty impressed with PeerStreet lately. It is not too hard to average 7-8% interest rate on hard money loans with maximum 75% loan to value ratio. My question is - what is the likely downside. I do not know a ton about funding real estate, but I have my ideas on how to estimate. Here are my thoughts. Let me know if any of this sounds off.

First, the good times. It seems reasonable to expect 1-2% foreclosure rates during the good times. This is what I have found at a couple web sites. It also matches PeerStreet's relatively short history. With a 75% loan to value ratio, I would expect to lose very little principle. I would still expect to make about 7-8%.

Second, the recession times. About every 4-5 years, expect a recession with loss of jobs, regional areas of high unemployment, and higher foreclosures. Maybe expect 10% foreclosure rate each year? With a 75% loan to value ratio, expect to lose a fair amount of interest and some principle. Maybe lose 4% of my investment for a total of 7%-4% = 3% gain during these years. Does this seem reasonable?

Then there are the major correction years. These are the 2006 - type years. These occur roughly every 16 years. Real Estate prices across the country would drop 10% - 50%. With a 75% loan to value ratio, expect to lose maybe 10% on my investment for the year.

If all this is true, then I would stand to make 5-6% or so long term. This sounds pretty good to me. This assumes the quality in the loans do not degrade. Does any of this look way off base?

Thanks for your thoughts.
Title: Re: Downside for PeerStreet
Post by: DaveP on April 03, 2017, 01:16:47 PM
Update from PeerStreet about their one foreclosure (Venice Beach):

"Yes, the Venice property was paid in full last week. We were able to recover all principal balances as well as pay some accrued interest over the time period."

1% yield bump link for anyone to use on their 1st investment:
http://www.peerstreet.com/join?ref=hadmf6

Title: Re: Downside for PeerStreet
Post by: rawraw on April 07, 2017, 09:10:53 PM
I have been pretty impressed with PeerStreet lately. It is not too hard to average 7-8% interest rate on hard money loans with maximum 75% loan to value ratio. My question is - what is the likely downside. I do not know a ton about funding real estate, but I have my ideas on how to estimate. Here are my thoughts. Let me know if any of this sounds off.

First, the good times. It seems reasonable to expect 1-2% foreclosure rates during the good times. This is what I have found at a couple web sites. It also matches PeerStreet's relatively short history. With a 75% loan to value ratio, I would expect to lose very little principle. I would still expect to make about 7-8%.

Second, the recession times. About every 4-5 years, expect a recession with loss of jobs, regional areas of high unemployment, and higher foreclosures. Maybe expect 10% foreclosure rate each year? With a 75% loan to value ratio, expect to lose a fair amount of interest and some principle. Maybe lose 4% of my investment for a total of 7%-4% = 3% gain during these years. Does this seem reasonable?

Then there are the major correction years. These are the 2006 - type years. These occur roughly every 16 years. Real Estate prices across the country would drop 10% - 50%. With a 75% loan to value ratio, expect to lose maybe 10% on my investment for the year.

If all this is true, then I would stand to make 5-6% or so long term. This sounds pretty good to me. This assumes the quality in the loans do not degrade. Does any of this look way off base?

Thanks for your thoughts.
You think a 50% decline in real estate only results in a 10% loss?  How did you get to that?  I don't know enough about Peerstreet to comment, but your long term return doesn't seem out of line.
Title: Re: Downside for PeerStreet
Post by: au88 on December 09, 2017, 08:30:12 AM
If you start with a 75% LTV then you can afford a 25% drop with no loss.
Title: Re: Downside for PeerStreet
Post by: rawraw on December 17, 2017, 01:19:20 PM
If you start with a 75% LTV then you can afford a 25% drop with no loss.
Yes, theoretically correct but too bad that isn't how things play out.  I think you should do more reading of how real estate lending works and what happens when things go wrong.  Banks rarely fail because of consumer lending, but they fail because of real estate lending a lot.
Title: Re: Downside for PeerStreet
Post by: JohnnyP on December 29, 2017, 12:57:49 AM
OK, how come that is not how it plays out? Because things take years to sort out the foreclosure, etc.?

Thanks.
Title: Re: Downside for PeerStreet
Post by: Fred93 on December 29, 2017, 02:15:02 AM
OK, how come that is not how it plays out?

There are lots of ways things can go wrong.

Loan-to-value ratio can turn out to be less meaningful than you had hoped, because the value doesn't materialize.

Perhaps the "value" was what the broker or whoever thought the property would be worth after the upgrade, but things got botched and the buyer stopped paying half way thru the demolition, so the upgrade never happened and meanwhile you have a half-torn-apart house to sell ... or the person estimating "V" was just plain wrong ... or the house next door turned into a biker gang drug den, or the neighbor sues over some issue with the remodel, maybe a fundamental issue involving encroachment, or just the impact of the vacant half-torn-apart house sitting there for a year making the neighborhood look bad.

If buyers aren't scared away by the half-torn-apart house, perhaps botched plans which need to be redone and reapproved by the city (possibly adding a 1 year delay) will scare them away.

Meanwhile you might have to wait 1 to 2 years (while getting no interest) for all this to become clear as the property works thru workouts and foreclosure and resale to find out how much you're going to lose.
Title: Re: Downside for PeerStreet
Post by: KentSantoro on July 22, 2019, 09:09:59 AM
Thanks for the clarification!