What is zero-based underwriting and how does RealtyMogul do it?
Commercial Real Estate
RealtyMogul has successfully financed hundreds of millions of dollars in real estate projects the nation over. What’s more, we finance only 1% of all capital requests received. This reflects not only the volume of transactions our platform and technology are capable of originating, but our commitment to investor protection and consistent underwriting standards.
We convey the competitive advantages supported by our originations and underwriting platform by cultivating a diligent method and outlining the framework. One of the major advantages of our platform is that everything is done in-house. We do not have to rely on the data, reports or decisions of others to get a viable deal done successfully and efficiently.
The underwriting process is crucial in determine which commercial real estate opportunities qualify for review by our investment committee and, ultimately, which become available to investors on our platform. The underwriting process typically involves examining, identifying, measuring and highlighting pertinent investment risks to determine a transaction’s viability and remain as transparent as possible to investors so they are well-armed to make the best investment decisions for them.
The U.S. Department of Housing and Urban Development defines underwriting as “the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit history and a judgment of the property value.” The underwriter usually evaluates how much risk is involved in the transaction and the size and terms of the loan.
It is an inescapable fact that all transactions come with risk. These risks are both systematic and idiosyncratic, meaning some of these risks are market-driven and faced by all industry participants, while others relate specifically to a property’s characteristics and can be reduced through diversification. This also means some risks are somewhat controllable while others are not. The role of the underwriter is to determine sources and concentrations of risk. This involves recognizing their implications, both in likelihood and magnitude, and modeling the return profiles accordingly.
What distinguishes the RealtyMogul process is the exhaustive analysis generated in-house with proprietary data. We act as our investors’ trusted source and investment partner as our team works diligently to provide our investors with the most accurate, up-to-date and complete snapshot of any investment opportunity we offer. This includes the potential downsides and risks. This is what we define as zero-based underwriting.
The purpose of zero-based underwriting is to generate a non-biased analysis. The information in front of an investor should be free from unreasonable or dated assumptions that can unfairly influence the decision-making process.
By approaching all real estate transactions this way, our underwriters can be confident when projections align with those from the real estate company or, alternatively, pass on an investment when a true discrepancy is found. We determine validity by taking assumptions and comparing them to benchmarks. Any optimistic projections related to vacancy, expenses or rent growth, for instance, must be substantiated.
Big data is changing the way companies make decisions. Zero-based underwriting at RealtyMogul is driven by real-time information drawn from the transactions funded and the tens of thousands of financing inquiries we have received since 2013. We also work with industry-leading, third-party data providers to vet and then apply their research as an additional supplemental benchmark in our analysis.
Revenue and expense data, market leasing assumptions, sale and rental comps, and debt and equity metrics are just a few of the property-level data points we aggregate, track and carry forward in our models. This process yields meaningful data that has never before been available to the industry. Our investors capitalize on this research as they not only participate in but truly internalize and comprehend the key drivers implicit in each investment.
RealtyMogul is always seeking financing opportunities with proven owners and operators who possess a deep understanding of how to create value throughout the lifecycle of a real estate project. We look for distinguished specialists in specific markets, property types and asset classes that meet or exceed our underwriting requirements. These requirements include, but are not limited to, a detail of their current portfolio, track record, references, education and background.
Property and real estate company-level diligence is quantitative in nature. However, an accurate assessment of the qualitative factors is imperative to a sound and holistic analysis, including highest and best use, location and market sentiment. All underwriting decisions are at the discretion of our seasoned deal team that synthesizes this information and evaluates the merits, shortcomings and overall adequacy of a proposed transaction.
The manner of direct participation in commercial real estate investing may have changed since the advent of online real estate investment platforms, but the basics remain the same. A thorough and transparent underwriting process allows real estate companies and investors alike to leverage the collective intelligence and advantages of RealtyMogul’s platform so they can make a more informed investment decision. This means swift commitments for real estate companies, as well as a diverse set of risk-adjusted real estate opportunities for investors.
RealtyMogul’s investment committee brings more than 200 years of collective experience underwriting, managing and acquiring more than $5 billion in transactional value across national products and markets. This provides a well-rounded view of investments to our investors.