One of the things that makes GROUNDFLOOR unique as a source of funding for real estate projects is the fact that we offer a true deferred payment loan option in addition to the more standard monthly payment option. The difference between the two is simple. The monthly payment option requires the real estate developer (who we commonly refer to as the “borrower”) to pay interest to GROUNDFLOOR on a monthly basis until the loan term ends. The deferred payment option, however, allows the borrower to not pay a single interest payment until the end of the loan term, at which point he will pay the entire interest balance (known as a “balloon payment”).
Each kind of loan offers different benefits for real estate developers, and having the option to choose allows them to pick a loan structure most suited for their project. However, there are some key differences between the monthly payment and the deferred payment option. Let’s explore these differences from the perspective of a borrower and that of an investor looking to invest in loans on our platform.
A Borrower’s Perspective
For real estate investors looking to get financing, having the option to choose between monthly payments and deferred payments can make a big difference for their projects. Since unanticipated problems -- and therefore unanticipated costs -- happen frequently in the real estate industry, it is an advantage to be able to keep all funding in hand until the very end of the loan term. As a result, the majority of the borrowers we work with choose the deferred payment loan option (provided they qualify for such a loan) to keep the most cash in hand to use towards their projects.
Since payments are not collected monthly in the deferred payment model, the terms of the loans revolve around regular property inspections and updates from the borrower regarding the progress of the project. Borrowers are required to order inspections every 60 days and send monthly progress updates to ensure work is progressing according to schedule. GROUNDFLOOR withholds the renovation budget in escrow and releases the funds to the borrower as they complete the renovations.
Some developers, however, choose to stick with the more traditional monthly payment loan option. The interest and points on these loans are slightly lower than on deferred loans, and as such a monthly payment loan may make more financial sense for shorter-term projects. Under the terms of our monthly payment loans, borrowers agree to make payments each month. Payments are due on the 1st of the month, with the final day to pay with no penalties by the 15th of the month. If a borrower is late on a payment, draws to receive additional funds will not be processed until their account is current. Late payments cause GROUNDFLOOR to issue a notice of delinquency, and late fees are charged to encourage timely repayment. If a loan becomes 90+ days delinquent, GROUNDFLOOR issues a notice of default and, if necessary, can begin the foreclosure process. (Fortunately, in the company’s history, we have only had one monthly payment loan ever go into foreclosure.)
To learn more about how our team manages the loans on our platform, please refer to this blog post.
An Investor’s Perspective
For the everyday investors who invest on our platform, the difference between investing in a monthly payment or deferred payment loan often boils down to a preference on how you prefer to receive interest payments. Under the deferred payment model, interest payments are made at the very end of the loan term, after the real estate project has been completed. Investors begin accumulating interest from the moment their money becomes active in the loan, and all of GROUNDFLOOR’s rates are annualized.
To read a walkthrough of how GROUNDFLOOR calculates your actual investment returns, please refer to this blog post.
Under the monthly payment model, however, interest payments are disbursed each month to the hundreds of investors that helped fund the project. This process plays out as follows:
In the monthly payment model, interest payments are disbursed to investors one month after the borrower makes a payment.
Typically, investors will receive their first interest payment on a loan approximately two months after the crowd has fully funded the loan in question. For example, if a loan has fully funded in September, the borrower’s first payment will be due in October. These interest payments are then processed and disbursed to each investor in the loan the following month. So, in the example above, the interest payment made in October will be deposited in investors’ accounts in November. Similarly to the way utility bills are charged, interest payments that are deposited are for the month prior, not the current month.
As mentioned above, monthly interest payments are due by the 15th of each month, and GROUNDFLOOR processes these payments for disbursement on or around the 17th of each month. We use an industry leader in payment processing to aid in the notification, collection and tracking of monthly payment loans. As such, we wait a reasonable period of time to ensure all tracking and reporting with our third party accurately reflects the monthly activity. Additionally, we want to ensure borrowers have a chance to remedy a late payment during the cure period. As such, we start to review the borrower payment activity on the 15th of every month. After we review the payments received, we process investor payments shortly after or notify our Asset Management team of the delinquent payment.
In a scenario where the borrower misses the deadline for a monthly interest payment, the investors will not receive the payment until two months later.
In a scenario in which a borrower is late on an interest payment, that payment will not be disbursed to investors until the next time interest payments are processed. So, in our previous example, if interest payments are received after the 15th of October, they will not be processed until the next round of processing occurs, and therefore investors will not see the interest payments land in their accounts until December. Put another way, the payment processing for monthly payments is not ongoing; rather, it happens on or around the 17th of each month. As such, if a borrower misses the processing deadline for that month, the interest payment will not be processed until the following month, meaning the investors will not see the payment land in their accounts until the month after that.
Please note that you begin accruing interest the moment your money becomes active in the loan -- as such, even if a borrower is late on a payment, you are still accruing interest. The interest will simply be disbursed to you at a later date once it has been processed. Typically, borrowers who miss a payment deadline will submit the late payment with the following month’s payment, resulting in what looks like a double payout for investors.
We hope this helps illuminate the differences between the monthly payment model and the deferred payment model and how interest payments are disbursed under each. As always, if you have any questions, don’t hesitate to reach out to us at email@example.com and we will be happy to assist you.