want to use the original sales price and there is no recent appraisal,
then it is best to capitalize the NOI using the profit-and-loss state-
ment. In fact, many lenders use this method even if there is an
appraisal or a closing statement showing the original sales price as a
way of testing the current cash flow against these proven values. For
example, if there has been an increase in operating expenses or
income and occupancy is on the decline since the effective date of the
most recent appraisal, it is safe to assume that the property value is
in decline as well, thus making this method a safeguard for the
lender.
Balance of Mortgages
An REO Schedule must include the balance of mortgages for each
property encumbered by a first lien. What the lender is after here is
the borrower’s current total debt on the property, which should
include all subordinate liens. Often the amount of the new loan
request is insufficient to pay off all of the existing loans, so it is very
important to make sure that the total balance shown in this column
truly represents the total outstanding balance of all liens. Many times
borrowers omit the second or even third liens, creating confusion for
the new lender. First liens, second liens, and even third liens must be
added to show how much debt is owed against the property. This
amount can help the lender determine the loan-to-value (LTV) ratios
for each property. For example, if the market value is stated to be $5
million and the total debt is $4.5 million, then the borrower’s current
LTV on this property is 90 percent. That is a highly leveraged prop-
erty, which lenders consider unacceptable. However, if the aggregate
market value for all of the properties is $20 million and the aggre-
gate debt is $15 million, then the aggregate LTV is much lower at 75
percent. A lender can tolerate a few properties that may be over-
leveraged as long as the aggregate leverage is in line with the usual
Real Estate Assets
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