As with any investment, Groundfloor loans aren’t risk-free, and exposure to risk must be approached thoughtfully and managed carefully. With fix-and-flip loans such as those we offer for investment here at Groundfloor, there are two aspects of risk to consider: the extent of loan repayment and the timing of it. At Groundfloor, maximizing the repayment of principal and interest is our highest priority, and minimizing the time of repayment runs a close second.
Our Asset Management team monitors each loan carefully and actively communicates with borrowers about project progress. We work hard to proactively identify and address any potential issues, and when they are found, we work closely with borrowers to map out a viable resolution, such as a repayment plan, extension, or refinance. The vast majority of the time, we are able to return full principal and interest to our investors; according to our recent portfolio analysis, 98% of the loans we’ve repaid to date have repaid in full. We strive to avoid any loss, and of the more than 1,750 loans we’ve repaid since our inception in 2013, just 38 have experienced some degree of principal loss – and that realized loss was less than 1% of the total principal invested. In dollar terms, our realized losses are less than $10 out of $1,000. Under the circumstances for the type of lending we do, we’re proud of this record.
For an inside look into how we’ve accomplished these results, here’s a step-by-step, detailed walkthrough of our underwriting and asset management practices.
Step 1: Underwriting
The first step to managing risk is properly identifying it. When a borrower approaches Groundfloor for financing, our team must decide whether or not to underwrite the loan. The term “underwriting” refers to the assessment of risk in relation to certain criteria.
Groundfloor’s underwriting process begins with a thorough screening of every loan application by reviewing the principal’s (and all guarantors’) credit reports, background checks, lending history, and real estate experience. Public records are reviewed to verify experience, and if applicable, we review and quantify the applicant’s past loan activity. We require a third-party feasibility inspection to be completed for each transaction involving rehab or construction funds. This feasibility study performs a line-by-line item analysis of the borrower’s scope of work and rates the feasibility of the budget to cover the proposed project. After this report is completed, a valuation study is conducted based on the feasibility study’s findings as well as on an independent review of comparable properties (“comps”) in the area, with the aim of achieving a proper and fair analysis of the borrower, project, and market. Overall, more than half of borrowers’ projected after-repair values (ARVs) are redefined through this review process.
Once all third-party reports are completed, the Groundfloor team finalizes the approval or declination of the application. The loan is then passed through our loan grading algorithm, which assigns a letter grade “A” through “G” to the loan to denote the relative risk level. Each grade corresponds to a range of interest rates that properly price the risk. Grade A loans are generally low-risk and offer correspondingly lower returns, while Grade G loans provide higher returns in exchange for increased risk.
Our grading algorithm has been qualified by the U.S. Securities & Exchange Commission (SEC) and takes into account 1) the valuation and strength of a particular project and 2) the experience and risk profile of the borrower. The exact scores of the grading algorithm are available on each loan’s loan detail page.
As the first company qualified by the SEC under Regulation A to offer real estate investments to the general public, Groundfloor is also subject to a great deal of government oversight to ensure compliance with regulatory law. We are required to publicly disclose information about the structure of each investment opportunity we offer, as well as financial and operating information of our company as a whole. As a result, investments on Groundfloor come with a degree of transparency that has never before been offered to non-accredited investors.
Step 2: Monitoring
Once we accept and underwrite a loan, Groundfloor partners with the borrower to ensure they have the tools and resources they need to be successful. Our team employs proactive asset management practices to ensure projects stay on track and are in compliance with loan requirements. If a deviation from plan or another concern becomes apparent, we promptly contact the borrower to understand the situation and work through the issue together.
Most of our loans fund renovation work to prepare a property for sale or lease-up. Borrowers must pay for the renovation work up front and then request a draw for reimbursement. Before any funds are disbursed, we employ a local, experienced third-party inspector to evaluate the completed work for quality and ensure it aligns with the plans, schedule, and budget submitted at the outset of the project. Groundfloor also requires borrowers to maintain sufficient insurance coverage, remain current on all real estate tax obligations, and keep the property free of any liens (other than Groundfloor’s first lien).
The Asset Management team also requires borrowers to provide regular updates to investors on project progress. Making sure investors are well informed of the health of their investments is of the utmost importance to our team and is a unique feature of our lending and investing platform. To further promote transparency, Groundfloor also publishes a detailed report each month on loan repayments and asset management activities to give investors even more information about the performance of their investments.
To keep borrowers focused on loan maturity, we contact the borrower regularly throughout the loan lifecycle, reminding them of the upcoming maturity and discussing how they plan to pay off the loan. These discussions allow us to prepare a payoff statement and coordinate with the closing agent or new lender, while also allowing us to get ahead of a situation that may result in a payoff occurring later than the stated maturity date. If the situation warrants, we or a designated third party may meet with the borrower at the project and conduct a property inspection to understand the property’s condition and hear directly from the borrower how they plan to achieve a successful exit. This intervention helps ensure any problems are resolved promptly, with minimal impact to Groundfloor, and is critical to mitigating risk and minimizing loss for our investors.
Step 3: Recovery
In some situations, rigorous underwriting and proactive asset management are not enough. That’s where the real art of asset management comes into play: recovery. The true measure of how effective we are at protecting your investment is the loss ratio (the amount of principal lost expressed as a percentage of the total principal invested) on troubled loans. As our recent Portfolio Analysis shows, of the 1,582 loans repaid as of Q3 2021, just 36 experienced some degree of loss - and the loss ratio resulting from these repayments was just 0.7%. As a lender secured by a first mortgage, we always have the right to foreclose on a troubled loan. However, we seek to resolve problem loans in a manner that is quicker, more cost effective, and ultimately economically better than a foreclosure. Once a loan is 45 days from maturity, our Asset Management team assesses the state of the project to identify and get in front of any potential issues. If any are found, our team initiates discussions with the borrower to learn more about the loan’s status and determine the best path forward.
Our team uses a progress decisioning matrix to evaluate the status of troubled loans and determine which properties need to be referred to counsel for foreclosure. This matrix takes into account factors such as how much of the loan amount is left to disburse, how long past maturity the loan is, when the last draw took place, and whether or not the borrower has previously applied for an extension. This organized approach and defined process helps our team identify and address those loans most at risk of non-performance.
If the loan is in good standing and the borrower simply requires more time to finish the project or sell/refinance the property, our team may extend the loan by providing a forbearance agreement, which grants the borrower an extension of the loan term in exchange for a fee and increased interest points. In order to qualify for an extension, borrowers must have all tax and insurance obligations up to date, and also must agree to progress inspections at Groundfloor’s discretion.
When foreclosing on a delinquent loan is necessary, our team has two trusted firms we work with to guide the property through the foreclosure process (which can vary widely depending on location) and set a foreclosure sale date. At the foreclosure sale, Groundfloor can either be outbid by someone for the property, or it will remain with us as a real estate-owned (REO) property. If Groundfloor is outbid on the property, we are able to exit the project and use the sales proceeds to repay our investors. If Groundfloor is not outbid, we retain title of the property and have to then prepare the property for sale at our own expense.
Here are two recent case examples of our recovery efforts:
Example 1: The Groundfloor team recently resolved a loan where the borrower completely stopped communicating with us. Our Special Servicing team made multiple attempts to reach the borrower during the month following their last communication with us. After 30 days of no contact, the file was referred to legal counsel to initiate foreclosure proceedings. During this time, Groundfloor continued to reach out to the borrower in an attempt to satisfy the loan without having to continue with legal action. Outreach attempts were ultimately unsuccessful, so a foreclosure sale date was set. We notified our counsel of the full amount Groundfloor’s investors were owed. The property was then sold at auction, and the proceeds were enough to return full repayment including interest to investors.
Example 2: Groundfloor recently resolved a loan that experienced multiple delays that prevented timely repayment. The borrower continued to run into permitting delays as well as personal financial challenges and was ultimately unable to finish the project. Groundfloor initially provided the borrower with a forbearance agreement to grant them more time to finish the project, but the forbearance period expired with no significant progress made. As a result, Groundfloor referred the file to counsel for foreclosure. The property was sold at the foreclosure auction, with the sale proceeds returning full repayment of principal plus interest to investors.
At Groundfloor, we take great care to do everything we can to protect the interests of our customers, whether that’s guiding a borrower to achieve a successful outcome or resolving the problems that customarily arise in real estate investing. We hope this has given you a clearer idea of how we manage all of our loans from start to finish. As always, please feel free to reach out to us at email@example.com with any further questions, or drop us a line in the comments.