Over the past few years, the world of investing has expanded more than ever before and investors can now utilize different portals, marketplaces, and intermediaries to gain access to new asset classes. Building a portfolio of real estate or other investments requires serious analysis and an assessment of your own risk appetite, and using different intermediaries to set up those investments takes a large amount of control away from the investor. This aspect becomes most critical when things do not go as planned, particularly when the borrower defaults.
When this happens, you need to make sure that you are comfortable with your chosen intermediary’s processes and trust them to make the right choices for you, the investor, while understanding how much of the situation they are able or even allowed to disclose.
Some of the main concerns of EstateGuru’s investors are:
- How is the portal operator making sure that my defaulted investment is recovered?
- What steps are they taking to ensure the recovery?
- If I receive no loan updates, are they doing anything at all?
With this blog post, we aim to answer each of these concerns and shed some light on the most recently recovered defaults, sharing things that our investors may or may not know about depending on whether they participated in those defaulted loans.
It is important to understand that, in the banking and financial sector, defaults are an inevitable part of doing business and that the eventual outcome depends on how well the company is able to resolve them, how much exposure they have taken on, and what is the security for the investment. Once defaults occur, it is not a matter of whether the risk assessment process missed certain details. It simply means that certain risks (market risk, borrower risk, operational risk or something else) have become a reality.
EstateGuru has a risk team of four members (see our organisational structure) and, starting from 2019, the team has one more professional contributing 100% to the default processes on a daily basis. As the team is based in Estonia, we have established strong cooperation with our liquidation partners in all of our operating countries. Moreover, EstateGuru also has a security agent in each country where we operate.
What exactly is a security agent, and what is their role?
The security agent is a legal entity, a firm that is established and controlled by an independent leading law firm with the intention of representing EstateGuru’s investors in all notary dealings. The security agent is the link between the bailiff and the investors, and they represent our investors in all court and bankruptcy proceedings. The bailiff’s task in the process is to ensure the legal nature of the liquidation proceedings, seize the properties that are to be liquidated, arrange auction processes, ensure that the liquidated property is available and there are no tenants occupying it etc. The bailiff’s task is also to ensure the legal nature of handing over all notifications and documentation to the borrower, hence all proceedings require time, especially if the borrower is unwilling to cooperate, or is avoiding the bailiff.
In all EstateGuru’s current markets, the enforcement procedure is relatively similar in its nature – EstateGuru terminates the contract with the borrower, and then the case is handed over to the security agent who prepares all the documentation and forwards it to the bailiff.
Once the borrower has been notified, a 30-day voluntary enforcement procedure follows. This means that the auction process halts for 30 days, giving the borrower time to repay the loan before the bidding begins. After this 30-day period, the auction is announced, and a 20-day registration process begins, after which the bidding lasts for five days. This is a legal requirement and cannot be altered.
It’s important to know that the first auction round is always held with the price of the valuation report, after which the price can be lowered. However, EstateGuru’s team always decides how much time to give the borrower before announcing the auction, depending on the nature of the case, how realistic it is to expect it to be resolved prior to the auction etc. as an auction can be the most time-consuming path to take in regaining the investors’ funds.
Now, let’s go through three resolved default cases which all have different resolutions.
1. Kohila mortgage loan
The loan went into default status on 25th of September 2018. With this loan, EstateGuru followed the standard procedure of announcing the auction. While six auction rounds were held unsuccessfully, during the seventh auction, the property was sold to a buyer. The loan was repaid on 12th of August 2019 and resulted in a 16.45% return for the investors.
Overall, Kohila represented the most standardized process of liquidation, which required more time than estimated initially, however, it generated a reasonable return for all involved investors. Hence, the investors’ patience was most definitely justified.
2. Pringi business loan, stage 1-5
The Pringi loan presented a challenge for the EstateGuru team, as the borrower had a potential buyer for the entire company (the borrower), which is why EstateGuru was willing to provide the borrower additional time to resolve the case. Had EstateGuru placed the property into auction, the sales of the collateral would have failed, the company would have been declared bankrupt and the total return could have been significantly lower due to time spent and potentially lower repayment amounts.
This method is a very common one used by EstateGuru’s risk team to determine whether the sale without the auction process is realistic and what is the fastest way for the investors to regain their funds. Also, it is important to be aware of the fact that once EstateGuru concludes the contract and starts the liquidation process, the borrower might lose their motivation to communicate with the portal operator and provide information of the collateral/situation. This is an aspect to keep in mind when deciding on the next steps and ensuring that the process is being managed strategically.
The Pringi business loans were funded between August 2017 and May 2018. The loan was repaid on the 29th of March 2019. The bankruptcy hearing was set for the following day after the notary transaction for the sales of the company. As a result of extensive negotiations with the borrower and other parties, EstateGuru reached a solution in which it had to waive claiming penalties, indemnities and partial interest to ensure the successful repayment of the loan. This was a precondition for the sale of the borrowing entity to occur, during which all creditors waived their claim in a certain amount to ensure the successful repayment of the loan principal. The loan resulted in a return of 7-11%, depending on the stage of the loan.
3. Tuigo street development loan
The Tuigo street development loan is another good example of a default process, as the case is different due to the fact that the borrower declared bankruptcy. In these circumstances, a bankruptcy hearing is held and a bankruptcy administrator is assigned, whose responsibility it is to determine the assets and responsibilities of the borrower.
For each problematic case, there is also the question of how much information EstateGuru can publish without potentially harming the sales process of the collateral. We are constantly working towards improving the default communication, however, there will always be certain loans (such as bankruptcy cases) for which the information is too sensitive to share without potentially compromising the deal.
Bankruptcy proceedings do not decrease the value of the established first rank mortgage. However, it could be a potentially time-consuming situation. The Tuigo development loan borrower’s bankruptcy was announced on 27th of September 2018, and as of today, five auction rounds have been held. The loan has two properties as collateral (private houses under construction) and one of them has been sold and, for the second one, an interested buyer exists. Hence, we are expecting the loan to be repaid soon, and the final return will be determined at the moment of the final repayment.
To conclude, there are standardized options to liquidate properties and there are strategic decisions the EstateGuru team takes on a daily basis to ensure the successful repayment of problematic loans. The team works on the basis of ensuring the fastest possible repayment at a return rate that is sufficient for our investors’ portfolio. Once a loan goes into default, the solution can sometimes be time-consuming; however, the niche product of property-backed solutions with first-rank mortgage gives investors a strong level of security.
In addition, of course, you can take comfort from the knowledge that a team of real estate professionals is working towards benefitting your portfolio on a daily basis.
At the moment of writing this blog article, EstateGuru has facilitated 1052 loans, out of which 450 loans have been repaid to the investors successfully. 11 defaulted loans have been recovered, no capital loss has occurred and currently 23 unique projects (in total 41 stages) are in the default status – with these loans the progress is ongoing on a daily basis to ensure their timely recovery!
