The 5 Cs of Credit

Commercial Real Estate Agent with Intero Silicon Valley and Rebekah - Two Names You Can Trust!

When I started in real estate in 1988 it was illegal to have a numeric score associated with your credit report. We learned to get a general impression of the company, their leadership and their spending habits by reviewing their trade lines. How they used credit and the consistency of their re-payment. From this we generated a hypothesis of the risk associated with the borrower and made a credit decision.

Since then it has become uncommon to even know what a tradeline is. Today the client is just a number and no amount of cajoling can change that - especially since the underwriter is a twenty something kid just out of college and doesn't hardly know what a tradeline is!!

In college we learned about the 5 Cs of credit. To me they are a much more reliable way to gauge risk than a credit company's logarithmic formula. Maybe that's just because I can see the logic behind the 5 Cs while the credit companies won't divulge their numeric reasoning.

So, here are the 5 Cs:

1) Character - also known as integrity. Does the person do what they say they will.

2) Capacity - the ability to repay. Often based on past evidence and/or a current paystub.

3) Capital - also know as a down payment. Folks are less likely to default if they have skin in the game.

4) Collateral - something of value that the lender can sell if the borrower fails. "The House"

5) Conditions - current market

When I analyze and investment, tenant or overall transaction based on the above, I get a very clear view of the borrower's current position and I have pretty good instincts into how their behavior will follow. It works for me. And I hope it can be a tool in your analysis tool box.

Posted by

Rebekah Owen, MBA

SanJose-RealEstate since 1988


CA 00994952. TX 0555675


Comments (4)

John Cunningham
eXp Realty - Phoenix, AZ
Helping Phoenix Sellers and Buyers find each other

Rebekah- Would have been different if the lenders would have taken these wise principles into account durring the buying frenzy.

Nov 27, 2010 09:42 AM
Marie Haydock
Evergreen Global Homes & Land | RSVP Real Estate - Redmond, WA
Simplifying Real Estate

Rebekah, these are good, solid benchmarks to qualify and quantify both good investors and good investments.  I appreciate your more honest and relevant approach to investment analysis.

Nov 27, 2010 09:45 AM
Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

This is well written and makes alot of financial sense !!!!!!!!

Nov 27, 2010 09:57 AM
Chandler Real Estate Liz Harris, MBA
Liz Harris Realty - Chandler, AZ

Yes, I agree with John! It would have been VERY different if the lenders took these wise principles into consideration 2004-05!

Nov 27, 2010 09:58 AM