Poor underwriting works more than 85% of the time, when the market is rising. In fact, it is so easy, even a caveman could do it. Mistakes are masked, ignorance forgiven and laziness is concealed….until the market changes and all these errors are not only exposed, but magnified.
If that’s true, then what market are good underwriters underwriting for?
High level underwriters understand that markets do not continue to rise forever. At some point there will be a sea change. Perhaps that change will be a small drop, or perhaps something more dramatic. Whichever way it goes, the best underwriters underwrite deals today for tomorrow’s eventual anemic conditions.
Poor markets are likely the only market that will ever test your underwriting, your disciplines and your character. From 1992-2007 (19 years and over 1,000 loans), after the formation of our first fund, our firm foreclosed on and took control of less than a handful of properties (maybe five). From 2008-2011 (the real test of underwriting) it was probably five times that many. We were tested.
Classic Lessons from the “Professor of Tough Markets”
Choose your leverage levels prudently. It is important to watch leverage levels and location when everything feels good and seems to work, so you avoid the harsh financial hangover of tomorrow.
Choose your locations wisely. Some locations are better able to weather a downdraft than others.
Choose your sponsors carefully. Some sponsors will work with a lender during difficult markets, some sponsors will compound the problem.
Don’t slack on these disciplines now, and when the winter comes, which it always does, you’ll reap the rewards of peer leading performance and extensive investor confidence. You will then rise to the status of “Proven”, a title few ever achieve.