In this episode, Dan discussed the concept of 'borrower skin in the game', which refers to the amount of money or equity a borrower has tied up in a deal, acting as an incentive for them not to default. He highlighted the importance of down payment size in assessing loan risk, with 20% plus being the gold standard, 15% plus being very good, 10% plus being normal, and below 5% being risky. Dan also emphasized the need to consider the purchase price of the loan relative to the market, as inflated prices can increase risk. He concluded by noting that financial literacy levels among borrowers vary, and that loan risk assessment should take this into account.
He also discussed the importance of down payment and equity in a borrower's willingness to repay a loan. He emphasized that a borrower's skin in the game, or their incentive to repay, comes from the down payment they made, rather than the equity they have due to price appreciation or loan payments over time. He shared examples of borrowers who did not appreciate the value of their equity and did not take steps to protect it. Dan concluded that while equity from price appreciation is valuable for the lender, it may not necessarily impact the borrower's willingness to repay. He encouraged the team to consider these factors when dealing with note investing.
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