It is an indisputable fact that the lower the loan-to-value (LTV) ratio is on a property, the safer the lender’s capital is on that particular loan. However, that presupposes one critical condition:
The lender must have a solid grasp on the absolute cash value the securing property would earn in a reasonable period of time.
If they don’t have that, then what the lender really has is what we call “loan-to-conjecture,” not “loan-to-value. It is the word “value” in loan-to-value that is the paramount issue in making a smart deed-of-trust decision.
SFG management feels strongly that each property carries its own unique LTV ratio which the property could comfortably support. This value should only be assigned after the lender has thoroughly analyzed all necessary issues affecting the property’s ability to be sold, which includes marketing time and costs of sale. There are at least five critical areas that must be investigated and understood prior to assigning the appropriate maximum LTV ratio. These include:
• Location
• Market demand (absorption rate)
• Property type
• Condition
• Borrower quality
Though extremely conservative on LTVs, we would rather be at a 70% LTV on a highly marketable property in a solid location than at 50% on a single use building in a secondary location, or on a property in an outlying area where sufficient market demand cannot be assured. In fact there are many cases where no LTV ratio would be low enough to justify the “hassle factor” of having to liquidate a difficult piece of real estate. In these cases, we may just politely decline the loan request. Many borrowers however, only wish to borrow a portion of their “lendable” equity (i.e. staying within their means instead of the lender implementing certain disciplines). It is for this reason that each specific LTV ratio in our portfolios will vary from loan to loan depending on the merits of the collateral, each being thoroughly analyzed.
Although all portfolios boil down to one loan at a time, there is more in a loan-to-value ratio than just a number. Remember, sometimes a 70% LTV can be better than a 50% LTV. We are very proud of this strategic philosophy at Seattle Funding Group which has taken years of refinement. It has served us well in employing and preserving each and every investment we make, while positioning our borrowers for the best outcome and highest probability of success.
