Due Diligence Checklist

This streamlined checklist should help you quickly assess and compare funds. Even if you’re not looking for a fairly conservative investment, these questions can help you consider what you want to ask and whether a fund matches your strategy. Many of these questions also apply to evaluating individual notes on a platform.

Make-or-Break Questions:

  1. Borrowers and Properties: Who are your borrowers, what properties do they buy, and where?

  2. Loan-to-Value (LTV): What is the maximum allowed LTV and the current weighted LTV?

  3. Withdrawal Policy: What is your withdrawal policy?

  4. State Laws: Do you loan in states without a non-judicial process?

  5. Owner-Occupied Loans: Do you loan to owner-occupied properties?

  6. Loan Position: Do you only do first position loans?

  7. Foreclosure: How aggressively do you foreclose on delinquent borrowers?

  8. Minimum Investment: What is your minimum investment amount?

  9. Audits: Are your financials audited? For how many years and by whom?

  10. Performance: What is your current and past performance?

Operations and Details:

If the fund passes the initial tests, delve into more detailed questions about operations and practices:

  1. LTV Calculation: Do you calculate LTV based on cost or after repair value?

  2. Construction Draws: How do you verify construction work before releasing money?

  3. Reserves for Draws: How do you handle reserves for construction draws?

  4. Penalties: Do you charge penalty interest? Who receives this income?

  5. Default Metrics: What are your definitions for overdue, default, and uncured default? What are your current default rates?

  6. Foreclosure Recovery: What is your average recovery rate on foreclosures?

  7. Extensions: What percentage of loans are extended, and what is the average extension length?

Nice-to-Haves:

  1. Third-Party Appraisal: Do all properties have a second opinion from an independent appraiser?

  2. Principal Investment: How much money do the principals have invested in the fund? Did they invest on the same terms as regular investors?

  3. Performance in Recession: How did you perform during the last recession?

  4. Management Fees: What are your management fees?

  5. Capital Deployment: How long before newly accepted capital is deployed?

  6. Fund History: How long has the fund been in business? What are your current assets under management and number of properties?

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