Andres Luts is the Chief Credit Officer at EstateGuru and is tasked with managing the platform’s credit policy across several European countries.
In this, the second part of his interview about EstateGuru’s credit risk policy, he discusses the enforcement proceedings when borrowers default on their loans, gives some advice to investors on how to judge projects and explains why borrowers choose EstateGuru loans over ones from banks.
You can read Part One, which deals with the company’s risk policy in general, here.
Question: So, you’ve explained how you minimize risk, but what happens when things do go wrong?
Answer: When loan repayments are overdue to the point where we move the loan to an official ‘default’ status, our first action is always to have our in-house debt-collection manager (or external debt-collection partner) contact the borrower for the last time. We try to get them to cooperate with us and make the payments, as this remains the easiest solution with the best results. But, if we don’t receive a satisfactory answer or any results, we start the enforcement process. First off, we terminate the contract. In some countries, we have default lawyers to help us with this process, as it is important that we do these actions by the letter of the law. We need to get the collaterals that were put up against the loan to auction as soon as possible.
Q: So the process differs from country to country?
A: A little bit, yes, as it takes different amounts of time and effort in each country. Of course, we also sometimes have hostile borrowers who might file for bankruptcy and try everything possible to fight and delay the process. In general, I think we have done a really good job in this area, and have even sold some claims without needing to go to auction, as some of the bigger real estate investors have bought defaulted claims and collateral properties directly from us.
We have successfully recovered about half of all defaulted loans to date, and the rest are still in the recovery process.
Q: If a borrower defaults on a loan, do you ever do business with them again?
A: No, definitely not. This is also why we use the strongest and best debt collection agencies in each country as the so-called normal business relationship has ended. For example, in Latvia, we have a very good partner who specializes in these kinds of tricky recoveries where the borrower opposes the process in most of the cases. The same goes for each country where we operate, we find the very best legal partners.
Q: How would you say your risk management and your processes differ from the competition?
A: The key difference is that we don’t have an inefficient banking legacy (where processes are quite often still manual), so we are much more technologically driven than our competitors. Along with that, we have real estate development with valuation experience and deep knowledge of the SME financing industry. Our founders are some of the most experienced real estate developers in Estonia. So this expertise along with fast and efficient credit risk analysis is the main differentiator. And we are adding lots of data science on top of it.
Q: What would your advice for investors be, what could they do to better assess the potential of a project they see online and understand the opportunity and risks?
A: I think that they should take time just to look through the materials, look through the borrower profile, and research who they are. What are they doing? Is the project logical when you analyse the collateral evaluation report and business plan?
They should assess if the value of the project is fair. If possible, they should compare transactions in the same area and determine if they think the valuation is correct, maybe if they have time, visit the property if they live nearby, or do some market research about this area and think about liquidity. If something happens to the project, is the collateral enough to cover this loan? And that’s it, I think the basic, basic, logical assessment. Of course, we do all of this before we issue the loan, but it is also important that investors understand the risks and that they build their own knowledge of the process so that they are fully empowered to make investment decisions.
Finally, I would suggest to them to never rush the investment decision. When they have been investing with us for a long time, they probably develop a sort of gut feeling about which project they like, but we still advise taking the time to analyze everything.
Q: You have many development loans that use different financing for new stages of their projects. How do you decide, OK, they will get another financing round? What might be reasons why they won’t get another round?
A: If the borrower wants to finance in stages, we let them order a new evaluation for every stage. Also, in some cases, the construction supervisor is looking at whether the loan already issued has been spent on the construction or the project. And if they give us the green light, then we will do the next stage with new pictures and we will add an update of the progress under the project description. We also visit the site to make our own inspection and if the loan distribution rules are not being fully followed, and they have bought a Porsche, for instance, with the previous loan, even if they have repaid it, then, of course, we don’t give them any more money.
But usually, we don’t have a problem. So we haven’t seen that some borrowers are not using the loan for construction or for that project. But we double-check everything and nothing will be given out if we get the confirmation that they have used the money for anything other than the previous stages for that project.
Q: Do the borrowers have to do a kind of regular reporting to you about how everything is going in the case of stage financing if they want to get more money?
A: Yes, we keep in touch with the borrowers, to see how they are doing with the property during the development process.
Q: If a borrower comes to you and says here I have a problem with this project, do you collaborate with them or give them advice, maybe how they could solve it? Or is it they merely inform you?
A: If the problem involves financing or some kind of logical steps, how to finance these projects, then yes, we are always open for discussion and to help our borrowers and then try to be very flexible if needed. Our real estate knowledge really comes in handy here, as we understand the issues that arise, even in very good and solid projects.
Q: A question that often comes up is why people would borrow from you at a higher interest rate than they could get from the bank?
A: You need to understand our product. Our main business is in bridge loans and business loans, so fast and quick, short-term loans. And that’s why borrowers are willing to pay higher interest rate. They need money quickly for a short time. And then, once the project is off the ground and running, the traditional financier comes in with a lower interest rate.
When we entered Germany, many people asked how is it possible? But yes, we are seeing that there are borrowers who are willing to pay because they need money fast, they need for instance to buy the object quickly and they are willing to pay these short-term higher interest rates before the bank comes in and refinances the loan. Their profitability is still high with our interest rate levels.
Q; Thank you very much for your time and the great, detailed answers.
A: My pleasure.