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What is zero based underwriting and how does RealtyMogul.com do it?
March 31 | 2016

Zero Based Underwriting 

$700 million – this is the amount that RealtyMogul.com has successfully financed, through 330 real estate projects nationally, over the last two years. What’s more, this value represents only 2% of all capital requests received. These statistics reflect not only the volume of transactions that our platform and technology are capable of originating, but our commitment to investor protection and consistent underwriting standards. The sections to follow will define our method, outline the framework, and aim to convey the competitive advantages supported by our originations and underwriting platform.

Zero-Based Underwriting

At RealtyMogul.com, the underwriting process dictates which opportunities qualify for review by our investment committee and, ultimately, become available to investors on our platform. Underwriting is the process by which investment risk is identified, measured, and highlighted so that a transaction’s viability can be determined and an informed investment decision can be made.

All transactions bear risk – both systematic and idiosyncratic – meaning that some of these risks are market-driven and faced by all industry participants, while others relate to specific property characteristics and can be reduced through diversification. More importantly, this means that some risks are somewhat controllable while others are not. The role of the underwriter is to determine sources and concentrations of risk, recognize their implications – both in likelihood and magnitude – and model the return profiles accordingly. What distinguishes the RealtyMogul.com process is the full analysis that is generated in-house with proprietary data, independent from borrower or sponsor materials. This is what we and others call zero-based underwriting. The purpose of this approach is to generate a non-bias analysis free from unreasonable or dated assumptions. By approaching all real estate transactions in this way, our underwriters can be confident when projections align with those from the sponsor or, alternatively, pass on an investment when a true discrepancy is found. In other words, to determine validity, assumptions are compared to benchmarks and any optimistic projections related to vacancy, expenses, or rent growth, for instance, must be substantiated.

The Process

Big data is changing the way in which companies make decisions. Zero-based underwriting at RealtyMogul.com is driven by real-time information drawn from the 330 transactions funded and nearly 17,000 financing inquiries received since 2013. Moreover, we work with industry-leading third-party data providers and apply their research as an additional 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, and our investors capitalize on this research to not only participate in but truly understand the key drivers implicit in each investment.

RealtyMogul.com 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, 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.

While much of our property and sponsor-level diligence is quantitative in nature, an accurate assessment of the qualitative factors are also 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 who synthesize this information and evaluate the merits, shortcomings, and overall adequacy of a proposed transaction.

The Team

The investment committee at RealtyMogul.com brings over 200 years of collective experience underwriting, managing, and acquiring over $5 billion in transactional value across products and markets nationally. Working closely with related divisions – including Data Science, Technology, Legal, and Operations – the intellectual capital at RealtyMogul.com comprises professionals from a variety of backgrounds, all of whom bring experience and insight to bear in the underwriting process. The caliber of our dedicated team reflects our commitment to quality and execution.

The Impact

While the way in which direct participation in commercial real estate investing has changed since the advent of crowdfunding, the basics remain the same. Through a thorough and transparent underwriting process, RealtyMogul.com allows sponsors and investors alike to leverage the collective intelligence and advantages of our platform so that they may make more informed investment decisions. This means swift commitments for sponsors, and a diverse set of risk-adjusted real estate opportunities for investors. As with all opportunities offered on RealtyMogul.com, investors should evaluate each individual real estate investment opportunity to see which best fits his or her investment strategy. We invite you learn more about our opportunities and process by contacting a member of our Investor Relations team here.

Kyle Barnas
Written by , Commercial Debt & Equity Associate at RealtyMogul.com

Kyle sources and evaluates investment opportunities as well as performs due diligence and writes content for various debt and equity transactions. Since joining RealtyMogul.com, Kyle has underwritten over $500 million of commercial real estate nationally across asset types.

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