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Collateral risk in real estate involves the potential loss for lenders if borrowers default on loans secured by property. A building valued at Birr 135 million can secure an outstanding loan of Birr 85 million, but marketability issues may arise during default. To mitigate this risk, banks should monitor construction progress and consider location and market demand factors.

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16 views1 page

CCC

Collateral risk in real estate involves the potential loss for lenders if borrowers default on loans secured by property. A building valued at Birr 135 million can secure an outstanding loan of Birr 85 million, but marketability issues may arise during default. To mitigate this risk, banks should monitor construction progress and consider location and market demand factors.

Uploaded by

fiseha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Collateral risk in a real estate business refers to the risk associated with

using property as a form of security for a loan or investment. If a borrower

defaults on the loan or if the value of a property decreases significantly,

there is a risk that a lender may not be able to recoup the full amount of the

loan. For example, at 100% of completion, a building's value Birr 135 million

would serve as strong collateral for the outstanding loan that can reduce the

bank’s collateral risk. A total outstanding loan to be transferred to the

customer is Birr 85 million, the executed work of an entire project as per the

engineering estimation is birr 99 million which is sufficiently secured.

However, the marketability of a building at the time of default may be

questionable due to getting affordable customer may be difficult. To

mitigate the risk, a bank shall monitor the construction progress. The

success of a real estate project often depends on its location and market

demand.

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