As with any investment, it’s vital to know the different risks involved in peer-to-peer lending before you put up your cash.
Equally important is how platforms evaluate, manage, and “present those risks,” according to a blog post published by EstateGuru.
As noted by EstateGuru, P2P lending is a fairly new phenomenon in the world of finance, however, it’s no “passing fad.” Investors and borrowers “stand to gain, in the form of higher returns for the former and easier access to credit for the latter, when the more staid, traditional forms of financing are removed from the equation,” the EstateGuru team explains.
They added that things that look or appear to be good are not always “what they seem.” In reality, there is “always risk involved in investment, and not all opportunities, or platforms, deal with it in the same way,” the company clarifies.
With a wealth of experience in the development and financial world on staff, EstateGuru is “well aware of this,” the company claims.
That awareness informs the firm’s risk assessment and reduction methods, and “thus far they’ve proven very effective,” the company reveals. To an almost frustrating extent in fact, “in that our track record is so good that some people fear it’s too good to be true,” the company claims.
Is peer-to-peer lending safe for investors?
As noted by EstateGuru, it can be “a nightmare scenario for any investor.” You log into your account “only to find it no longer exists.” Forget about returns, “what happens to your investments? Can they be recovered, and does anyone care? This site can’t be reached.”
EstateGuru points out that it is important to carefully review all the terms and conditions attached to any platform and determine whether there are any red flags. EstateGuru further notes that “comprehensive financial reporting should be conducted on a regular basis.”
EstateGuru also mentioned that previous involvement “in any form of financial mismanagement is a warning sign that your money might not be in safe hands.” You should “always prioritize the safety of your investments over potential returns.” the company recommends while noting that if a platform “makes claims that seem too good to be true, they probably are.”
The company also shared:
“EstateGuru is a facilitator of real estate investments and does not manage user assets. Investment contracts are signed between the borrower and the investor, EstateGuru simply facilitates this transaction. Should EstateGuru suffer bankruptcy, a contractual entity will be appointed to take over the role of EstateGuru to serve all of the investments. Even in this worst-case scenario, our users can still access their funds.”
“EstateGuru is managed by some of the most experienced real estate developers in Estonia. Our founder, Marek Pärtel, has been involved in the real estate industry since 2002, overseeing development and investment projects across Europe. He is also the co-founder of Invego, a leading residential property development group.”
The company further notes that their management team “includes some of the most experienced and well-regarded people in finance, appraisal, and property from around the world, operating in five countries.”
The EstateGuru team adds that the most obvious risk with P2P lending is “one inherent to every loan, that the debtor will fail to make interest payments timeously, or repay the loan at all.”
As has always been the case, “determining who or what constitutes a reliable investment is not always easy.” It also “holds true that the more eye-catching the potential returns, the more likely you’ll never actually see them,” the EstateGuru team notes. Platforms evaluate risk by “assessing potential borrowers’ according to criteria of their own devising,” the company explains.
“At EstateGuru, the vast majority of our projects are secured with a first rank mortgage. Potential borrowers are pre-vetted and meet strict criteria. Financial health is gauged and a comprehensive track record compiled, including evidence of past successes and a business plan if available. As we are real-estate-backed lenders, we also assess the real estate collateral in terms of location, market value, the valuation report methodology, and what it had previously sold for.”
The company further explains that they employ traditional banking credit procedures, “supported and expedited by modern technology.” They also consult third-party sources and maintain “contact with construction supervisors.”
Their staff conducts on-site inspections “on a regular basis until a project is complete. All of this allows for faster, more comprehensive evaluation.” EstateGuru doesn’t convene the board “once a week to ponder our next investment, we are financing projects 24/7 on our platform,” the company reveals.
They further noted:
“Our stringent evaluation criteria ensure it seldom happens, but EstateGuru has a fast and efficient recovery process in the event that a borrower moves into default status. First, we take every possible effort to reach an amicable solution. Should there be an abject failure to cooperate on the part of the borrower, we terminate the contract and move to have the collateral quickly auctioned, with a view to refunding our investors as soon as possible.”
“Another truism in life, and investment, is that putting all of your eggs in one basket is seldom a good idea. EstateGuru allows investors to diversify across loan types (development, bridge, and business loans) and markets (we operate in Estonia, Latvia, Lithuania, Spain, Finland, Portugal, and Germany, with plans to expand).”
EstateGuru also noted that investing in different loan types, with different securities, “minimizes concentration risk, while diversifying geographically reduces microeconomic factors relating to market or political risks.” Even with such measures, they recommend you “diversify outside of the EstateGuru platform and P2P lending more generally.” And it should be “a part of your portfolio, but not the whole thing. Spread those eggs around,” the company suggested.
The firm also mentioned:
“EstateGuru applies a low Loan to Value (LTV) ratio as an additional safeguard against market deviations. Our average historical LTV is below 60%, which means that the value of a property would need to decrease by over 40% for our investors to take a hit. By applying a low LTV ratio, choosing our markets carefully, and drawing on the expertise of dedicated, specialist staff, we feel we can keep our users’ money safe, and maintain our average return of just over 11%.”
EstateGuru added that it is vital emphasize that “no investment is a guarantee.” Thinking that anything is certain “is naive, and we would encourage you to always do your due diligence and ask hard questions before you invest your money.” Never invest “more than you can stand to lose, and be safe out there.”
The company concluded:
“All investments, including real estate, are speculative in nature and involve a substantial risk of loss. We encourage our investors to invest carefully. We also encourage investors to get personal advice from a professional investment advisor and to make independent investigations before acting on information that we publish.”