This is meant to be a quick introduction to how we here at AlphaFlow think about underwriting loans and how we invest. As part of our process, we look at 50+ factors when analyzing each loan. Our stringent underwriting process causes us to reject over 90% of the loans we look at. We also look at how that loan fits into the wider AlphaFlow portfolio, making sure we’re keeping our geographic exposures diversified.
At its core, our underwriting process looks at how likely we think the borrower is to repay, and more importantly, how attractive is the property as an asset. We break out our underwriting into three components: evaluating the borrower, the property, and the market the property is in. We’ll take a quick look at each category and a few of the factors we look at:
- We evaluate the history of the borrower, making sure that they have no criminal history, judgments, liens, or fraud convictions and check for foreclosures and bankruptcies.
- We check on the borrower’s flipping experience and repayment history, both with the loan’s originator and in general
- We look at the borrower’s relationship with the lender, making sure they don’t have too many deals open at once.
- We evaluate the property condition, price history and comparables to make sure the appraisals seem reasonable.
- We check the SOW to make sure it seems reasonable and complies with any zoning or HOA restrictions
- We check to see if the property is in a flood zone, and if it is, ensure that the property has flood insurance with the originator as the first-loss payee
- We check the trend of building permits in the area to see if there are a lot of new constructions in the area
- We check the largest historical price drop over both 12 and 18 month horizons to get an idea of what could happen
- We check days-on-market averages to see how quickly listed houses are coming off the market
Each of these factors helps to build a larger story about the loan, and combined with a larger market comparison analysis and loan terms gives us a more full picture about the desirability of the loan as an investment, and how attractive the exit strategy for the property will likely be (be it a sale, refi, or rental). The exit strategy is particularly important in case the originator or loan owner needs to foreclose on the property, and represents the best chance for an investor to get their principal back. As such, it plays a major portion in our evaluation of any loan.