How to Analyze a Real Estate Loan Deal or How to Underwrite a Loan Deal



This is far from my normal day-to-day underwriting, but I thought my readers would find this deal very interesting.  Because I am both an underwriter and a real estate investor, some clients ask me what they think about certain loan deals they are looking at participating in.

If you are unfamiliar with loan deals here is the quick rundown.  Banks sell certain loans all the time due to capital issues.  99% of the time the bank is selling loans to investors because they want (read: need) the loans off of their books.  Therefore, investors bid on these loans.  They are typically sealed bids.  Currently, the market is red hot right now in Florida and investors are bidding around 90-95 cents on the dollar for notes related to Florida properties.  Conversely, in the bust of the market you could buy these notes for around 10-15 cents on the dollar.

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This investor gave me 12 deals to look at, and I’m only going to highlight and detail one of them.  The others were thrown out for the typical reasons: high LTV, poor legal documentation, too competitive (Florida Properties), etc…

This was the main facts from the deal sheet:


analyze a note deal 1 analyze a note deal 2 analyze a note deal 3 analyze a note deal 4



analyze a note deal 2


analyze a note deal 3

analyze a note deal 4

For Guarantor Support, basically there is no way the guarantors could repay this loan.   There was only one family with a moderate salary and $15K in liquidity.


So if you are a reader of this blog, hopefully you have figured out that the current capital structure is not sustainable.  When underwriting and analyzing real estate investments I always like to create two financial models a base case scenario and a stress test scenario.  I highly encourage everyone to do this.  Most investors just play around with different scenarios.  However, when you create two separate spreadsheets for this and save them, you are able to go back several years later and see how accurate you were with detailing the financial projections.

Here is my stress-test case scenario:


multifamily property real estate analysis stress test


Since the property was being handled by a third-party property management company that doesn’t even answer their phone, I thought the current cash flow and capital structure was a very realistic stress-test.


This was my base case scenario:


multifamily real estate analysis

The only two variables that changed from the stress test is:


1)      I increased rent $20/unit to $495

2)      I assumed you paid 90% of the legal balance ($723,497) and this was refinanced at 4% on a 20-year amortization schedule.


Importantly, even when assuming 30% vacancy this property is still profitable!


The investor that brought me the deal likes to foreclose on his note deals quick and turn-the property around for himself.  I recommended bidding 80 cents on the dollar for the outstanding legal balance ($803,886).  This puts his bid in at $643,109.  With a current appraisal of $1,275,000, his effective LTV was 50%.

Of-course, if the current owners sold the property north of the loan amount, my investor gets paid in-full and makes $160,777.  This actually happened last time and my investor made over $100,000 in 30 days on a $160,000 note purchase.  Not bad for a months’ worth of work.

Learn More About Me and How I Built A 6-Figure Real Estate Business While Working Full-Time