Author Topic: Lending Club Exists for the Profits of Whom?  (Read 2668 times)

rawraw

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Re: Lending Club Exists for the Profits of Whom?
« Reply #15 on: December 19, 2017, 07:34:04 PM »
For me, it was virtually riskless because I could see the late notes before they showed up as late. 

I "thought" I was doing okay at filtering for bad notes, between my manual work, automation and selling strategy. I found out as others did, I wasn't seeing bad notes as well as I thought. That's ultimately why I stopped lending.

I respect your thoughts rawraw and would ask what you see as the risk in sites like Fundrise. I know no investment is risk free. To me, an investment like Fundrise that's backed by actual property that can be foreclosed if not paid and some return received seems like a much safer bet than what I personally experienced at LC. I've been in Fundrise now for 2 years- haven't lost any money yet- and about 12 of the properties they invest in for me have completed and paid off. What am I not seeing or considering that you think are key, and that I should be?

As said in my previous post, the time, effort and returns work better for me at Fundrise. Less time to manage, daily effort to maintain, and good returns.
Unfortunately I'm not as familiar with Fundrise.  I tried reading their website but it is all marketing stuff and no real detail.  Can you describe the type of lending they do?  Also, what legal structure are the loans offered to you.  I can tell you broadly the risks.  Historically, banks don't fail by doing consumer lending.  But they frequently fail from real estate lending.  Collateral can only go so far, especially the typical type of real estate deals I see the P2P sites doing. 

dr.everett

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Re: Lending Club Exists for the Profits of Whom?
« Reply #16 on: December 21, 2017, 03:33:57 PM »
For me, it was virtually riskless because I could see the late notes before they showed up as late. 

I "thought" I was doing okay at filtering for bad notes, between my manual work, automation and selling strategy. I found out as others did, I wasn't seeing bad notes as well as I thought. That's ultimately why I stopped lending.

I respect your thoughts rawraw and would ask what you see as the risk in sites like Fundrise. I know no investment is risk free. To me, an investment like Fundrise that's backed by actual property that can be foreclosed if not paid and some return received seems like a much safer bet than what I personally experienced at LC. I've been in Fundrise now for 2 years- haven't lost any money yet- and about 12 of the properties they invest in for me have completed and paid off. What am I not seeing or considering that you think are key, and that I should be?

As said in my previous post, the time, effort and returns work better for me at Fundrise. Less time to manage, daily effort to maintain, and good returns.
Unfortunately I'm not as familiar with Fundrise.  I tried reading their website but it is all marketing stuff and no real detail.  Can you describe the type of lending they do?  Also, what legal structure are the loans offered to you.  I can tell you broadly the risks.  Historically, banks don't fail by doing consumer lending.  But they frequently fail from real estate lending.  Collateral can only go so far, especially the typical type of real estate deals I see the P2P sites doing.

They do several different types of real estate loans. Looking at what shows in my investments, I see Construction Loans which typically acquire property to build upon, in one case 11 small lot homes in Los Angeles. I see an Acquisition loan, in this case they bought a property with a retail space that is currently leased, and will be adding to it a 140 unit apartment building by going through a zoning change. They also have a couple of Condo projects doing similar building along with some Townhome and Hotel projects- the hotel one is interesting- it's a 63 room hotel and 15K sq ft. property in Pennsylvania.
 
The loans are offered as an EREIT (electronic Real Estate Investment Trust), at the end of the year we'll get a 1099-DIV and a K-1 if invested in one of their EFunds. I think the way I'm invested I'll only get a 1099-DIV. (We'll see- this is the end of my first year doing this...)

If there's specific things you want me to look for as a member let me know and I'll see what I can find behind the "glossy shiny stuff".

rawraw

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Re: Lending Club Exists for the Profits of Whom?
« Reply #17 on: December 21, 2017, 07:30:49 PM »
I figured it was C&D or ADC lending, which is one of the riskiest loan types that exist (outside of subprime stuff).  There are a few things that you need to think about.  First, why is a loan with collateral yielding the same as an unsecured consumer loan?  There is only two answers to this.  The first is that even with the collateral, the risk is similar to the unsecured consumer.  The second is that it is an inefficient loan category that will disappear as the risk is priced more effectively.   While both are likely at play, I suspect the first explanation is the majority.

The second is  what is your actual collateral?  How do they measure the loan to value?  I could get a loan to build a golf course.  I spend $500k to buy the land and the appraisal says that when it is completed, it is worth $10 mil.  What value should I use in my loan to value?  In an ADC loan, what if I'm buying over valued real estate.  If I sell you swamp land for $50 mil. and you get a $10 mil. loan against it.  Is that a safe loan because it is 20% LTV? 

What is the legal structure of the loans?  Do the loans have recourse against the developer or is the project the sole source of repayment? 

The other question is what determines real estate value?  Well its a combination of the income produced and the multiple paid for that income.  Why do real estate values drop?  It is typically because the success of the projects and their cash flow no longer look as attractive as expected.  So the collateral's value and the borrower's ability to pay (assuming the loans are recourse, which may not be the case given they are construction yielding such high levels) are directly correlated.  So when things go poorly,  it all happens at once.

Hope this helps.

dr.everett

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Re: Lending Club Exists for the Profits of Whom?
« Reply #18 on: December 21, 2017, 09:28:37 PM »

What is the legal structure of the loans?  Do the loans have recourse against the developer or is the project the sole source of repayment? 


I see this on one of the loans- does it answer the legal structure question?

     Senior Secured Loan with Carve-Out and Full Recourse Guarantees
     The Borrower has provided customary bad boy carve-out guarantees as well as full recourse completion guarantees.

I also see this in terms of the valuation question for the same loan:

     The maximum principal balance of the loan commitment is $10,000,000, which is equal to roughly 72% the CBRE appraised value of the property from April 2017. The remaining portion of the project costs will be provided by the borrower.

If that doesn't answer the questions you raised- what would be a couple of the types/terms I should look for?


rawraw

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Re: Lending Club Exists for the Profits of Whom?
« Reply #19 on: December 22, 2017, 06:56:08 PM »
Does it give you the definition of the full recourse completion guarantees? If they guarantee, the question then becomes what the financial strength the borrower has outside of the project. Just to give you some frame of reference, these loans at a bank cost 5% or so. Why isn't these borrowers going to a bank? It may be they actually aren't sources of financial strength.

The appraised value is too broad to be useful. In our golf course example, that appraisal says we are fine too. The first thing is to find out what loan to value is that? Value as completed, value as is, loan to cost, etc. In our golf course example, loan to cost will be much different than loan to value.

I think you are looking at the right places. It's just we need more details to understand what's going on

dr.everett

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Re: Lending Club Exists for the Profits of Whom?
« Reply #20 on: December 22, 2017, 11:02:23 PM »
Does it give you the definition of the full recourse completion guarantees? If they guarantee, the question then becomes what the financial strength the borrower has outside of the project.

I can't find anything beyond what was stated about the full recourse and carve outs- looking a bit deeper, this particular project has five guarantors according to the Investment Summary. As to the strength of the company acquiring this loan, the summary states that they have deployed more than $50M in development in LA where this construction loan is located.

In one of the other loans in the same general area, LA, it's also a Sr. Loan, secured by the property, full recourse guaranties from the sponsor's principals. The loan amount is $4.9M, equal to 75% of the projected cost, with the remainder provided by the loan recipient. I don't see further specifics.

rawraw

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Re: Lending Club Exists for the Profits of Whom?
« Reply #21 on: December 23, 2017, 10:27:13 AM »
Prior development does that let us know much about financial strength, since real estate people are often highly leveraged. But it does give insight into experience.

Another area that is important to understand is how loan proceeds are disbursed. Does it address their process for draws at all?

dr.everett

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Re: Lending Club Exists for the Profits of Whom?
« Reply #22 on: December 23, 2017, 12:58:30 PM »
Another area that is important to understand is how loan proceeds are disbursed. Does it address their process for draws at all?

Not that I saw or could find.

rawraw

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Re: Lending Club Exists for the Profits of Whom?
« Reply #23 on: December 23, 2017, 04:16:26 PM »
At any rate, my broader point is that the things you need to know and think about when there is collateral is much more complex than unsecured consumer credit. You are trusting that these guys are doing it all right. But I think that's a risky proposition given the characteristics of the loans. They may be all star lenders, or they could be structuring things so poorly that you are making virtually unsecured loans without realizing it. This is why I suspect many of the people in real estate lending don't understand the risks they are taking. I still fear real estate peer lending is going to be what blows up and results in the sector getting regulated (and potentially kicking people out if they aren't accredited investors).