To ensure that you make the most of your experience as a peer-to-peer property lender, it’s critical that you (or the platform that you use in order to lend on peer-to-peer loans) do an enhanced due diligence on the loan before deciding to lend. Here, we’ll explain what the key five steps in an enhanced due diligence process are.
1. Meeting the borrower and visiting the site: As Moise Safra used to say ‘For eyes tell more than balance sheets’. By meeting the borrower and discussing the project, the credit underwriter is able to get a good understanding of whether the borrower can deliver the project he is promising. It is important to look at the borrower’s experience and track record, his team’s experience and track record as well as similar projects he has done in the past.
2. Analysing the project: Part of the due diligence process is to understand whether the project makes sense and whether it’s a good project. This analysis should include things like analysis of the local property market, supply and demand, rental market, local schools, hospital and amenities, the borrower’s financials including his assets, liabilities and credit history. This analysis will enable you to get a very detailed picture and assess the project viability.
3. Analysing the exit strategy: As a P2P lender, you are, well… a lender! And as a lender, you want to get repaid when the loan expires. So, it is vital that a key part of the due diligence is to understand how the borrower plans to repay you, or in other words what is their exit strategy from the project in order to repay the loan. This could be selling the property/properties or re-financing with another lender. If the exit is to sell, research on the local property market needs to be carried out so that you are comfortable with the borrower’s ability to sell within the timeframe and the price he is planning. If the exit is to refinance and hold the properties as Buy-To-Let, research on the local rental market needs to be carried out to ensure you are lending less than what the borrower can refinance at. A clear exit strategy always needs to be in place.
4. Ongoing monitoring: It is paramount that an ongoing monitoring of the loan is carried out. This is in order to ensure that the project is progressing as expected, and if there are any issues, these issues are spotted in time to address them.
5. Releasing funds in tranches: If all funds are released upfront and the borrower told ‘good luck, see you in 15 months’, there are a number of risks: risk that the borrower will use the funds to finance another project he is in trouble with, risk he wastes the money and doesn’t build as he has promised. Overall, the lender will have less control. That’s why it is key that funds are released in tranches and a survey is done after each phase and before releasing the next tranche.
Some of these steps are understandably difficult to do for an individual lender acting alone, and that’s why lenders normally will use a platform to help them access peer-to-peer loans. Different platforms will differ in their approach to due diligence. So, it is very important that as a lender you do your own due diligence on which platform to use before deciding to lend. Check out our available loans at http://www.blendnetwork.com and start lending now #LendWithBlend
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