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:
Borrowers and Properties: Who are your borrowers, what properties do they buy, and where?
Loan-to-Value (LTV): What is the maximum allowed LTV and the current weighted LTV?
Withdrawal Policy: What is your withdrawal policy?
State Laws: Do you loan in states without a non-judicial process?
Owner-Occupied Loans: Do you loan to owner-occupied properties?
Loan Position: Do you only do first position loans?
Foreclosure: How aggressively do you foreclose on delinquent borrowers?
Minimum Investment: What is your minimum investment amount?
Audits: Are your financials audited? For how many years and by whom?
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:
LTV Calculation: Do you calculate LTV based on cost or after repair value?
Construction Draws: How do you verify construction work before releasing money?
Reserves for Draws: How do you handle reserves for construction draws?
Penalties: Do you charge penalty interest? Who receives this income?
Default Metrics: What are your definitions for overdue, default, and uncured default? What are your current default rates?
Foreclosure Recovery: What is your average recovery rate on foreclosures?
Extensions: What percentage of loans are extended, and what is the average extension length?
Nice-to-Haves:
Third-Party Appraisal: Do all properties have a second opinion from an independent appraiser?
Principal Investment: How much money do the principals have invested in the fund? Did they invest on the same terms as regular investors?
Performance in Recession: How did you perform during the last recession?
Management Fees: What are your management fees?
Capital Deployment: How long before newly accepted capital is deployed?
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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