Trust Deeds Investing
How do I perform a value assessment of the property?
Value Assessment

Assuming a single family home is the property in question, you will need to employ the technique of examining past recent sale of comparable properties nearby. Anything older than six months (as a sale) will not be a reliable source of information as the marked could very well have changed. You must look at the price per square foot, and the absolute price that the properties were sold for. If you are able to find homes of similar size and stature and quality close by, the amount of the loan should still be significantly lower Thant the typical selling price of comparable homes. Even in dollars per square foot of property (living space) and in absolute dollars.

For a 2,000 square foot house on which you lend $200,000 (this equates to $100/ sq. ft.), similar homes should be selling for closer to $300,000 or more- about $150 per square foot, or more. This creates the all-important margin of safety in a big way should the market experience a drop in value during the life of the loan.

What is LTC? Why is it important?

Loan-to-cost (LTC) matters because it reveals how much “skin” a borrower shows in the buying process. A property bought for $300,000 when a trust deed investor provides a new loan for $200,000 means that the LTC is 66.7%. All things considered, if a borrower is making an excellent purchase, loaning 100% of their cost is not wise as the borrower will have no invested cash, and nothing important to lose should things go sideways.

What is LTV? Why is it important?

Loan-to-value (LTV) matters because it expresses directly the margin of safety. Property worth $400,000 with a loan amount of $240,000 has an LTV of 60%. Lower LTV means higher margins of safety. 60% or lower, for an LTV is a good rule of thumb for safety. But, on a small loan this still may not mean that such a loan is a safe bet.

What is the difference between LTV and LTC?
Difference in LTV and LTC

Foreclosure homes are typically purchased for less than fair market value. LTC is determination of the amount of equity borrowers have in their property- it is an indication of the financial motivating factors for repaying a loan. LTV however is relevant to the margin of safety for a lender. Both matter, both are important as you structure an investment. Foreclosure homes are being sold at an increasing rate as they are bid on by investors. This pushes the market closer to fair market value for the properties which closes the gap between the two, LTC and LTV.

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