Peer2Peer Finance News, the UK's first and leading peer-to-peer finance magazine has published an interesting article with useful tips how to conduct due diligence on P2P property investments.
The original article is available here and has also been reproduced below:
EVERY peer-to-peer property investment carries an element of risk. There is the risk that the borrower will be unable to repay the capital; the risk that the value of the property could go down; or even the risk that the P2P platform itself could go under.
However, for many investors, the prospect of double-digit returns with the added comfort of security makes these risks worthwhile.
No matter how much you trust your P2P platform of choice, you must always conduct your own due diligence before making a new property investment. Luckily, P2P property platforms are known for their high levels of transparency, which makes it easy for new investors to become informed before any money changes hands.
If you aren’t sure where to begin, read on for our tips on how to conduct your own due diligence on P2P property investments…
1. Check the credentials of the platform
The P2P sector is regulated by the Financial Conduct Authority (FCA). Before you invest in any platform, find out whether or not it has FCA approval to operate in the UK. The formal approval process can take up to two years, so if FCA approval has not yet been granted, ask if the application process is ongoing.
For extra proof of a platform’s credentials, ask if it is affiliated with any professional bodies. For example, the Peer-to-Peer Finance Association (P2PFA) is a self-regulated group which maintains stringent standards within the P2P sector. In order to join the P2PFA, platforms must demonstrate a strong track record and complete transparency, so membership should indicate that your platform of choice meets these criteria.
2. Check the loanbook
Some P2P platforms are happy to publish their loanbook statistics on their website. Usually presented as an Excel spreadsheet, the loanbook will detail every one of the platform’s loans, along with the loan-to-value (LTV) on each property and any defaults incurred. While past performance is no indicator of future returns, by reviewing a platform’s loanbook you can get a good sense of its process and track record.
3. Read the small print
Each P2P property platform has its own set of terms and conditions, and it is up to the investor to read and understand these fully before committing any money. The small print might contain information about what happens if a loan defaults, or what fees you can expect to incur on various transactions.
4. Understand your risk exposure
Before you invest in any P2P platform, you should make a point of understanding the risk involved. Unlike equity investments, the main risk from P2P lending is not that you will receive a lower return than you hoped; it is the risk of defaults. When a loan defaults it puts your capital at risk. If you have invested in property-backed loans, you may be able to recoup your money through the sale of the property. Alternatively, your platform may be willing to offset some of your risk by covering a certain percentage of your losses.
Get to know your risk exposure by choosing your investments carefully, and checking in regularly to see how the borrowers are doing. On some platforms, you will be encouraged to pose questions to the borrowers so that you are completely comfortable with the risk that you are taking on. If possible, look into the borrower’s track record and keep an eye open for any defaults or late payments in their past.
5. Understand your liquidity position
Liquidity can be a big issue for P2P property investors – once you invest, your money could be tied up for the duration of the loan. However, some platforms offer a secondary market, where loans and loan parts can be sold to other investors. This gives you the option to sell out of your investment whenever you need to release your capital, so you aren’t tied in for the whole loan term. However, it should be noted that this is dependent on demand from other investors.
A few P2P property platforms will also allow investors to sell out of their loans at any time, without going through the secondary market. If this important to you, read the small print or call the platform’s phone line directly to confirm that you are eligible for this service.
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