When diving into the real estate industry, the first thing many investors think about is profits. The big dollar signs at the end of a project could be much smaller than they appear if your deal is not properly underwritten. This is the inside scoop on how Upright underwrites and hopefully it will help you get a clear perspective on your future real estate investments.
Underwriting Real Estate - what is it and how does it work?
The process of underwriting is used by lenders and financial institutions to assess the risk levels of a loan or asset. Lenders assess their own risk tolerance and guidelines and the same can be done by the investor.
The underwriting process includes the borrower and the asset. At Upright, the underwriting team first looks at the asset and then the borrower. The team works under a certain amount of assumptions from the sales team prior to receiving supportive documentation. The initial loan structure is created at this stage in the process. This allows for a more streamlined underwrite and reduces time spent on unfavorable projects.
Key questions notated in the underwriting process are as follows:
For the asset:
- Is it in a good location?
- Is the purchase price reasonable (at or below market value)?
- What is the current condition of the property (livable or a complete gut)?
- How much of a rehab does it need and what grade of finishes will be installed?
- How long will it take to complete the project?
- What is the exit strategy?
For the borrower:
- What is their credit score and credit history?
- What is their background history (any financial criminal activity, foreclosures or bankruptcies)?
- Does the borrower have significant liquidity?
- Prior experience (simply have they completed similar projects)?
Once all of the above risk involved has been verified, the assigned underwriter creates the final loan structure. The differences between the initial and final loan structures depend on if the assumptions used in the underwriting process were supported with documentation. In most cases, a third-party appraisal is ordered as additional support for the value of the property.
Upright's Underwriting Process
When your loan is underwritten by Upright, we give genuine thought to your deal from start to finish. Our goal is for you to succeed in every deal that you do with us. The underwriting team provides feedback on the purchase price, allowing you the potential to negotiate with the seller. This is crucial, as any value saved on the front end is money in your pocket, and can ultimately impact the final loan structure. The Upright underwriting team analyzes your capacity to complete a project as well as capability. It is important to us for you to have the most effortless and timely rehab project possible.
Now that you have the steps, take some time to outline your own risk levels. Consider a location where you could have success as a real estate investor and underwrite a property in your area.
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