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The presumption by some lenders may be that the increased property value after repairs, upgrades and rehabilitation will serve as the protective equity. But, as many lenders are discovering, they unintendedly assume major financial risk rather than the owner/borrower. Speculative real estate purchases require the allocation of risk-capital into high-risk, high-reward projects, usually intended to be assumed by the owner/borrowers rather than the lenders.
There is a significant difference in the security position between a lender making a loan to a borrower with current identifiable protective equity, or lending to an owner/ borrower with no cash equity, or any significant financial contribution to the project. No-skin-in-the-game is used to refer to an owner/borrower who has little or no financial capital at risk. The lender becomes the primary “risk capital” provider rather than the owner/borrower.
Here are a few current examples:
READ MORE: http://danharkey.com/why-do-lenders-make-loans-to-borrowers-with-little-or-no-skin-in-the-game/
