The best way a bank can protect itself against a significant drop in property values is to identify the warning signs as they appear. Therefore, as problems develop in real estate markets, it is necessary for bankers to allocate additional time to the review and evaluation of their real estate portfolios.
Signs of a Troubled Real Estate Market
There are several warning signs that real estate markets or individual projects are experiencing problems that may result in real estate values decreasing from original appraisals or from initial projections. Unfavorable economic developments and/or an overbuilt market can cause real estate projects to become problematic.
Signs of troubled real estate markets or projects include:
- Rent concessions or sales discounts resulting in cash flow below the level projected in the original appraisal.
- Changes in the original concept or design.
- Construction delays resulting in cost overruns, which may require renegotiation of loan terms.
- Slow leasing or lack of sustained sales activity, which may result in protracted repayment or default.
- Lack of any sound feasibility study or analysis on individual projects.