All about loan collateral: secured and unsecured loans

Moving Estate loans are secured with real estate and generally with a first-rate mortgage. When making the decision to invest in debt or loan, it is important to understand the risks and be aware of how the security deposited for your investment works should something go wrong. Not all debts are equal, and this is generally reflected in the debt ranking system. In this blog article, we will look at the types of rankings that are generally found in the peer-to-peer real estate loan sector. For simplicity, we have listed them from the safest to the most risky kind.

 

Primary debt

Primary debt

Senior debt, also known as senior debt, is a debt that takes precedence over other “subordinated” liabilities. It is usually realized through real estate collateral that has a higher value than the debt and is sold in the event of a default or liquidation to ensure the repayment of the debt. In the case of Moving Estate loans, the senior debt is secured by a senior mortgage. And when we talk about collateral at Moving Estate, we mean real estate assets. This should be clear, as companies can also provide inventory, receivables or machinery as security (commercial lien). However, in the case of liquidation, only real estate has a high value.

In practice, this means that the borrower must go to the notary’s office and sign a mortgage contract with our security agent before we can provide him with the money. This mortgage is held until the loan is repaid in full. In the event of default or non-payment, this contract enables us to initiate enforcement proceedings and take possession of the collateral provided for the loan. These real estate collateral can then be auctioned off or sold to recover investor funds. This form of secured senior debt is considered the safest for investors, but conversely, it generally has a lower return than the riskier types of debt listed below.

 

Subordinated debt (mezzanine)

Subordinated creditors are usually provided with collateral other than a senior mortgage. This can range from secondary mortgages, equity in the borrower’s business to investments or other assets. Should a loan default, the subordinated debt holders will not be repaid until all senior debt obligations have been met. The higher risk profile of subordinated bonds means that investors can usually expect a better return on their investments. Moving Estate has few secondary mortgage loans on real estate.

 

Equity

Equity

A direct investment in a company with the intention of making a profit or income could be a good idea if the company or project is successful. But as soon as things go wrong, it is important to understand the ranking that shareholders have in the repayment hierarchy. When a company is liquidated, the senior and then the subordinated liabilities are repaid first. Only when these higher debts have been fully paid can the remaining funds or funds be distributed to direct investors or shareholders.

If you look at the latest news in the Estonian crowdfunding scene, then mostly subordinated loans and equity investments on our competitors’ platforms have failed, so the loss of capital is probably inevitable.

 

How does it work at Moving Estate?

When a borrower applies for a loan to Moving Estate, one of our first tasks is to do a thorough risk assessment. We look at the business plan, the borrower’s track record and analyze whether his project meets our strict profitability requirements. Once we are certain that our strict standards are met, we will review the value of the collateral offered. Since we are active in the real estate sector, the collateral for most of our loans is usually the property to be developed itself, although we also accept other properties.

Here we calculate the loan to value (LTV).

Here we calculate the loan to value (LTV).

Although a finished property may theoretically be worth USD 100,000, it would indeed be very risky to offer a loan for that full value. For example, we generally strive for an LTV relationship that we are certain will result in full capital raising at an auction.

The fact that we secure loans with a senior mortgage means that our investors are the first to claim when a borrower falls behind schedule and that they are the first to be able to recover their funds from the sale of the collateral. By adhering to this practice and keeping a close eye on the LTV, we have been able to operate without losses for our investors for over four years. In all cases where a loan is in arrears, we have been able to fully recover the funds. Since loan defaults are obviously burdensome for every investor, the security that guarantees a priority claim should let every investor sleep peacefully.

Property On Estate sells the collateral of its first defaulted loan

In October, Toome avenue development loan in the amount $ 224,000 reached its maturity date, however the borrower had become insolvent and was therefore unable to repay the loan. Property On Estate’s COO Andrew Wilsons comments that the bailiff agent has declared an auction process that starts on 14th of November 2017 and has a starting price of $ 313,280. The collateral is a 544.7 m 2 private house that is situated on a 1577 m 2 property in Nõmme district Tallinn. The collateral has been valued by an accredited valuation company Life Estate Company in the valuation of $ 440,000. The auction can be found on the following link.

Taken possession of its first defaulted loan’s collateral and has started the sales process to regain investors’ funds. 

“Toome avenue development loan is the first loan among all facilitated 220 loans for 3 years that has been declared defaulted, however a good thing is that our risk model is efficient and investors’ interests are covered. During the entire process, Property On Estate’s representatives have been in constant contact with the borrower who remains fully cooperative. The borrower has the chance to repay all debt and regain control over the property before the auction has ended, ”Wilsons adds.

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As Wilsons explains, the first default evidently illustrates the reason behind Property On Estate only facilitating property-backed loans. “In our current portfolio, the average loan to value ratio is 58%. This means that in case the borrower becomes insolvent Property On Estate has a strong chance to regain all investors’ funds through selling the collateral property. In this particular case we have informed the Property On Estate security agent and the selling process has been taken over by our partnering bailiff agent. Property On Estate team is confident that the proceedings from the sales process will be sufficient to cover the entire cumulative debt. “

Toome avenue development loan was funded on 28th of October 2015 and the loan was financed by 294 investors. The loan collaterals are a private house in Nõmme, a 6.26 hectare property in Keila parish and a 6.31 hectare property in Keila parish.

 

The sales process of the collateral – how does it work?

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The public auction will be held by the bailiff on the www.Investmentslife.com.ee platform starting from 14th of November 2017. The interested parties have 20 days to register for the auction after which the bidding process lasts for 5 working days. Additional information about the collateral property can be obtained via email buroo.sepp@taitur.net and the same contact can be used to arrange a personal inspection of the property.

The person who wishes to participate in the auction bidding process must register on the Investmentslife.com portal and make a prepayment of $ 5000. The prepayment will be repaid to all participants who are not the winners of the bidding process the day after the auction has ended. After the auction has successfully ended, a notice will be forwarded to the E-land Registry and a new ownership will be established. The collateral will be released of all transaction prohibitions. All funds will be transferred through the bailiff agent and after the end of the auction process the buyer has 15 days to make the payment. The process will be stopped should the borrower pay all cumulative debt before the auction process has ended.