Real Estate Loans
Real estate loans have consistently been a part of the loan portfolio of community banks, including loans expanded to purchase real property. Banks like loans secured by real estate because, overall, real estate values appreciate rather than depreciate. Although, after a period of quickly increasing prices a price correction can be expected.
The degree of risk in a real estate loan depends firstly on the loan amount in relation to surety value, the interest rate, and, most importantly, the borrower’s capacity to repay in a time. Placing improper reliance upon a property’s appraised value over a debtor’s repayment ability is a potentially bad mistake.
Indications of a Troublesome Real Estate Loan
A principal indication of a troublesome real estate loan is an improper relationship between the amount of the loan, the possible sale price of the property, and the availability of a market. The possible sale price of a property may or may not be the same price as its appraised value. The current possible sale price or liquidating value of the property is of primary importance and the appraised value is of secondary importance. Keep in mind that bankers still remember the 1980s when there was little demand for real estate at its appraised value and it had to be disposed of at a sacrificed value.