When you invest in our Income fund, you’re not just buying a piece of a fund; you’re entrusting us with your capital. It’s my responsibility to protect that capital, and our underwriting process is the bedrock of that protection. I want to pull back the curtain and show you exactly how we evaluate every single loan before we deploy a dollar of your money.
Our philosophy is simple: we are asset-based lenders. This means our primary security is the real estate itself. While we do vet our borrowers, our main focus is on the quality of the underlying asset. If the property is good and the loan is structured correctly, your investment is well-protected regardless of what happens with the borrower. To date, we have had zero principal losses on the lending side of our business, and this is a direct result of our disciplined underwriting.
Step 1: Getting the Value Right (ARV)
The single most important part of underwriting a hard money loan is determining the After-Repair Value, or ARV. This is what the property will be worth after the borrower, typically a house flipper, completes their planned renovations. If we get the ARV wrong, everything else in our analysis is meaningless. This is where experience and conservative assumptions are critical.
We don’t rely on Zillow estimates or automated valuation models. We determine ARV by looking at recent, comparable sales (comps) in the immediate vicinity of the subject property. We look for properties that are similar in size, style, and level of finish. We then make adjustments based on the specific characteristics of our borrower’s project. We also have a deep understanding of the local markets we lend in, which allows us to make informed judgments about a property’s potential value. We always err on the side of caution. If a borrower thinks a property will be worth $500,000 after renovation, but our analysis shows a more conservative value of $475,000, we use our number. This conservative approach is the first layer of protection for your capital.
Step 2: The Loan-to-Value (LTV) Buffer
Once we have a conservative ARV, the next step is to determine the loan amount. We will not lend more than 75% of the ARV. This creates a significant equity buffer in the property. For example, if we determine the ARV of a property to be $400,000, the maximum we would lend is $300,000. This 25% buffer is your margin of safety.
Why is this so important? If the borrower defaults on the loan, we have to foreclose on the property and sell it to recoup our investment. The 25% equity buffer ensures that even if we have to sell the property at a discount, there is still enough value to cover the loan amount, any legal fees, and holding costs. Our portfolio’s weighted-average After-Repair-Loan-to-Value (ARLTV) is currently 66.52%, which is well below our 75% maximum. This demonstrates our commitment to maintaining a significant margin of safety across our entire loan book. All our loans are senior-secured, meaning we are in the first position to be repaid if the property is sold.
Step 3: Vetting the Borrower
While the asset is our primary security, the borrower is still a critical piece of the puzzle. A good borrower can execute a project efficiently and get our capital back to us quickly. A bad borrower can cause delays, cost overruns, and headaches. That’s why we prioritize working with experienced, well-capitalized house flippers who have a proven track record of success.
We look at a borrower’s experience, financial situation, and their team. Have they completed similar projects before? Do they have the cash reserves to handle unexpected issues? Do they have a reliable team of contractors? We want to see a borrower who treats their projects like a business, not a hobby. A professional borrower understands the importance of speed and execution. The faster they can complete the renovation and sell the property, the faster our capital is returned and can be redeployed into the next profitable loan. This focus on borrower quality is why we have been able to originate over $3 million in loans across 25+ projects with a smooth operational track record.
Step 4: Structuring the Loan for Success
The final step is to structure the loan in a way that protects our interests and incentivizes the borrower to perform. Our typical loan terms are designed to do just that. We offer a 9-month term, which is enough time for an experienced flipper to complete a renovation, but not so long that it encourages them to drag their feet. We charge 12% interest and 3% in origination points, which provides a strong return for our investors. We also charge a $700 documentation fee to cover our legal and administrative costs.
We also include provisions for extension fees. If a borrower needs more time to complete a project, they can pay a fee to extend the loan. This not only compensates our investors for the additional time their capital is deployed, but it also incentivizes the borrower to finish the project as quickly as possible. This combination of a relatively short term and the potential for extension fees creates a powerful incentive for borrowers to perform, which ultimately benefits our investors through monthly distributions and the rapid recycling of capital into new loans.
This four-step process—conservative valuation, a significant LTV buffer, thorough borrower vetting, and protective loan structuring—is how we protect your capital and generate the consistent, high-yield returns our Income fund is known for. It’s a disciplined, repeatable process that has allowed us to achieve an 18.36% annualized return to our LPs in the first year of Harvey Capital Funding I LP, all with zero principal losses.