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Thursday, August 21, 2008

Daily Observations - Collateral Evaluation

Just a quick note and right to the point. There are many misinterpretations as to how a bank will evaluate collateral. The following is the calculation that most lenders apply to determine Equity in a piece of property.

Step One - Take your Best Opinion of Value, hopefully what a professional says the property is worth, sometimes called a BOV, or a Broker Opinion of Value.

Step Two - Discount that value by the amount of at least 20%, because most lender will only allow 80% value to the real estate collateral.

Step Three - Now subtract any and all liens / debts against that property, including any other liens that the property has been pledged to support.

The remaining amount is the collateral value that a bank will apply as security for the loan.

NOTE - Some lenders apply even more stringent calculations.

For more on investment property and collateral value visit loanforbiz.com .

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