If you’ve ever invested with us, you’ve come to expect that the offering or loan you’ve invested in has a fixed maturity date — so you know when it matures and you get your principal back.
But what happens when the maturity date is extended? And why does that happen? Let’s explore:
Will I get my principal back?
99.7% of the time, yes. This is the percentage of principal we've repaid to our accredited investors since our founding.
Every borrower must first repay the underlying loan before any accredited investors are repaid their principal. While a loan extension might sound like a bad thing, for many accredited investors it can be quite lucrative and mean a greater return.
Do I earn income during the extension?
Yes, accredited investors will continue to receive monthly interest payments for the entire duration of the extension period. Additionally, borrowers must pay an extension fee as part of the extension approval process, which is shared between investors of that offering and us. Generally, loans are extended three months but can be longer.
Why was the loan extended?
The most common reasons a loan is extended are extra time needed to complete a rehab, finalize a sale, or to bring a refinance to close. These can be caused by a number of situations including lengthy and slow approval/permit processes, supply and labor constraints, liquidity delays from other assets the borrower holds that haven’t sold or refinanced as quickly as expected.
Our Asset Management team analyzes all aspects of a loan before granting an extension. Interest payments must be current, taxes paid, and insurance in place.
Why isn’t the original loan term just longer?
While we study regional housing markets, comparable sales, and trends, we can’t anticipate everything. Most of our short-term loans are between six and 15 months, which ensures our incentives are aligned with the borrowers’: Complete the project on time and get the cash flowing from selling, refinancing, or renting. The faster work is completed, the faster value is being added and the sooner equity can be gained from the project. As long as a borrower is transparent and communicates delays/issues they’re facing, continues to make payments, and a feasible plan and exit is still in the works, we will always work with them to offer appropriate extensions.
What happens if the loan isn’t extended?
At the end of the loan term, when the accrued interest and principal are due, if the borrower is unable to repay we have legal rights to protect our investment.
For example, our Account Management and Asset Management consistently communicate with borrowers and monitor project progress closely. If at the end of a 10-month loan the project risk has increased (due to several performance and progress factors), we have the option to not grant an extension. In this case, we will pursue an asset management strategy ASAP to recover the accrued interest and principal.
Isn’t an extension risky?
Actually, no. Extensions are a risk mitigation tool we employ to help maintain the borrower’s successful exit from the loan — which means whole principal repayment for you. Often, a borrower just needs a little bit more time to finish the project. Extensions actually help to keep incentives aligned and progress moving forward.
Why don’t you just foreclose on the property?
Foreclosure is a last resort because it actually isn’t beneficial for us, you, or the borrower. Foreclosures are expensive and time-consuming and can lead to litigation that can last years. And that’s time no one is earning money on the project.
Extensions simply provide additional time for the borrower to complete the project and successfully exit, and give accredited investors a more whole principal repayment in addition to extension fees and additional monthly interest.
In every situation, from a successful exit to an extension to a foreclosure sale or REO, our number one goal is to preserve capital and principal. We are always strategizing ways to manage risk for investors, as well as make getting funding more efficient, easier, and faster for our proven borrowers.
Explore our open investment offerings and funds, or if you have comments or questions, contact our Investor Relations team at ir@fundthatflip.com.
