Quite simply, we don’t like to lend on properties that are “a dime a dozen.” There’s far less demand for these types of properties (which are currently in drastic oversupply) and their true market value can undeterminable at times. At the same time, these types of properties can cause lenders a number of problems in the event that the borrower defaults and foreclosure is required. The protective equity margin disappears much more quickly when the actual margin is smaller. For instance, 50% protective equity on a $1 million property is $500,000 whereas 50% protective equity on a $100,000 property is only $50,000.

 

In the event of a foreclosure there will generally be accrued interest, legal fees and other costs associated with recouping your investment and they don’t necessarily change significantly based on the value of the property. The lower the value, the quicker those costs will eat into protective equity.