When engaging with prospective investors for our real estate and debt fund, one of the most important and frequently asked questions is: “What are the risks associated with your fund, and how are they mitigated?” This inquiry reflects the level of due diligence required by seasoned investors, as risk is an inherent part of any investment strategy.
While risk surrounds us in all aspects of life, from the mundane to the monumental, successful investments are predicated on thoughtful risk management. Below, we outline the primary risks associated with our fund and the proactive measures we take to mitigate them, ensuring stability and resilience for our investors.
1. Managing Loan-to-Value (LTV) Ratios
The cyclical nature of the real estate market can lead to fluctuations in property values during periods of contraction. Lessons from the 2008 financial crisis, where high LTV ratios left borrowers overleveraged, highlight the importance of disciplined lending practices.
Our fund maintains a conservative approach by lending at a maximum of 70% of the property’s after-repair value (ARV). This lower LTV ratio creates a substantial equity buffer, safeguarding against potential market corrections and minimizing downside risk for our investors.
2. Ensuring Proper Use of Borrower Funds
Rehabilitation projects inherently carry the risk of misallocated funds. To mitigate this, we employ a rigorous draw process. Borrowers must complete specified renovations and provide documented proof (via photos or videos) before receiving funds. This ensures that capital is used exclusively for its intended purpose, protecting the integrity of each project and the security of our loans.
3. Geographic Due Diligence
Real estate success is often summarized by the mantra: “Location, location, location.” While our team possesses deep expertise in the Charleston, SC Tri-County area, where over 55% of our loans are based, we also leverage advanced third-party software and require broker price opinions (BPOs) to assess property values across all markets. These tools enable us to make informed, data-driven lending decisions while maintaining a diversified portfolio.
4. Mitigating Foreclosure Risks
Foreclosures are an unavoidable reality in lending, but our proactive strategies minimize their occurrence. Since our inception, we have maintained an exceptionally low foreclosure rate, with just two instances out of 1,363 loans.
Our approach includes:
- Fostering Repeat Borrowers: With an 85% repeat borrower rate, we prioritize lending to individuals with proven track records of on-time payments and successful project completions.
- Compliance Oversight: Our dedicated director of compliance monitors borrower timelines, flags potential issues, and intervenes early to prevent defaults.
- Collaborative Solutions: In cases of borrower distress, we facilitate partnerships or property sales through our network of seasoned investors, creating win-win outcomes while protecting investor capital.
5. Adhering to Lending Regulations
Our fund operates exclusively with business entities (LLCs), exempting us from Dodd-Frank Act regulations. However, compliance with state-specific lending requirements is paramount. Before entering a new market, we consult experienced legal counsel to ensure full regulatory adherence, safeguarding both our operations and investor confidence.
6. Maintaining Robust Demand
Demand for our lending services has consistently outpaced available capital, thanks to our strong industry relationships and targeted outreach. Our strategies to sustain demand include:
- Sponsoring and attending real estate meetups and investor conferences.
- Leveraging podcasts, webinars, and social media campaigns, including our popular “Flipper Tip of the Week” series.
- Delivering exceptional service, which has fostered repeat business and referrals.
Should market demand ever slow, our scalable outreach efforts are primed to maintain a consistent deal flow.
7. Addressing Borrower Delays in Exits
In cases where borrowers face delays in selling or refinancing post-rehabilitation, our emphasis on relationship-building proves invaluable. By maintaining open communication, we collaborate with borrowers to explore alternative exit strategies, minimizing disruptions and ensuring a seamless loan cycle.
Conclusion
Risk is an inherent aspect of any investment, but our team’s disciplined, data-driven approach to risk management sets our fund apart. Through conservative lending practices, proactive borrower oversight, and a steadfast commitment to compliance, we strive to provide a secure and stable investment vehicle.
We view our role as custodians of your capital, and like skilled drivers, we navigate the road ahead with caution, vigilance, and purpose. This commitment ensures that both our investors and our company remain on the path to enduring success.