IN our last discussion on this series last week we delved into the nature and handling of real estate for the purpose of security/ collateral for a business loan.

We had noted the importance of title in the qualification of your real estate property for the purpose of a loan. It was made clear that without proper and unencumbered title the loan application based on real estate security/ collateral would be dead on arrival.

For your real property to attract loan it must have the appropriate title document (proof of ownership) that could be obtained, investigated and kept in the bank until the loan is repaid.  The acceptable title document is certificate of occupancy(C of O) which is issued by the state government as evidence of ownership.  Note that the bank has the duty to investigate the document before accepting it.

However, many banks could still accept a property without a C of O if they have confidence in the executed DEED OF ASSIGNMENT along with other ownership history.

It is also important to note here that, the prospective loan beneficiary is expected to sign away the property with a proviso to the effect that the ceding of the property to the bank would become effective upon failure to repay the loan as agreed.

We had noted the importance of location of the property in the value it commands in the loan amount. Perhaps we also need to add here that after title, location of the real property is the next most important factor in determining the acceptability of the application. Here the location should be such that disposal of the property for the purpose of loan recovery in event of failure would be easy for the bank.

However as good as real estate property might be for the purposes of loans there has been several downsides in recent years such us fraudulent documents, weak legal system for realization and taking possession of the assets amongst many problems. Hence for many banks the ownership or pledging of real property for loan would still require some other conditions which we shall discuss in subsequent editions of this topic.

Again this brings us back to where we started on the note that real estate security/ collateral for a business loan is used as fall-back position rather than main security since the bank was supposed to have done due diligence on the business cash flow and profitability as a means of realizing the loan.