Feedback Request: Private Real Estate Lending

Discussion in 'Private & Conventional Lending Discussion' started by Alejandri, Nov 2, 2014.

  1. Alejandri

    Alejandri Member

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    I have recently had some success making private loans to individuals with lots of equity in a real estate property that, for one reason or another, cannot qualify for conventional financing. This is not a new idea by any stretch of the imagination but the returns can be very healthy.

    Here is the anatomy of my last deal:

    The borrower inherited his father's house and needed money for his business. The house was free & clear and appraised at $400k. He needed $132k, which I lent to him from my savings at 10% plus a fee of $1,320. The borrower was required to purchase title insurance (which protects me from any liens that weren't apparent at funding but had a claim superior to my loan), homeowner's insurance where I was made a loss payee (house burns down, I get money), and a compliance company was contracted to take care of the regulations and loan paperwork. The borrower refinanced the loan with conventional financing as he showed more income in 2011.

    The loan was outstanding for about a year and, with the origination fee, my annualized return was in the neighborhood of 12%. Despite the volatility in the housing market, I feel the substantial equity protected this yield quite well.

    My question is, if there was a platform that allowed you to contribute a portion of the loan amount and secure a proportional percentage interest in the proceeds, would this be attractive. If anyone is familiar with prosper.com, this would be similar to that except secured by real estate where you would have recourse to foreclose in the event of nonpayment.

    I'd like to hear what reservations you would have with this type of arrangement as I am currently consulting for a company that is looking to make an online platform for this. These types of investments are generally reserved for the wealthy, and I would like to be a part in the effort to open it up to everyone.
    Thanks for your time and my apologies for the lengthy post.
     
  2. Theklozur

    Theklozur New Member

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    Alejandri, I'm a real estate investor and I use hard / private funding all of the time. With that said I'm always looking for more lenders so I can do more deals and eventually become a lender myself. This would be a great idea. If you or anyone you know have funds available for a deal now, I have two deals on the table that need funding right away. Please email me at [email protected]
     
  3. JR Ewing

    JR Ewing Super Moderator Staff Member

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    You're obviously going to do well charging 10% - as long as you find people willing to pay that rate, your routine expenses are kept under control, AND you get your payments on time with no added collection / foreclosure / legal expenses you'd have with deadbeat borrowers.

    That's the catch though. Those who are willing to pay 10% when banks are only charging 4% and finance companies are only charging a bit more are going to be high risk borrowers. It sounds like you lucked out in that regard in that the borrower simply had too little income to qualify for traditional financing, but earned enough to still beable to make payments. I would guess that him wanting to borrow for a self-employment venture and being self-employed also factored in though.

    It's similar to buying bonds in that regard - the companies, countries, and municipalities who pay the most interest are also the riskiest borrowers.

    Another concern investors may have is liquidity. I can sell bonds pretty quickly if I need my original investment back. But if I make a private loan to an individual, I may be stuck not getting my principal back in a lump sum (assuming he doesn't default)... particularly if he's a 10% borrower in this day and age.
     
  4. Investor

    Investor Well-Known Member

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    In effect what you are doing is like what mortgage companies do or what banks do, as @JR Ewing said, lend money, and charge interest then make sure that their investment is protected, really good idea, it will take money and a lot of legal work for people to get themselves into doing this kind of business. Anything withing Real Estate will get you good money, very good idea!
     
  5. Muthoni

    Muthoni Guest

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    There is a company in my region that buys land and constructs houses to sell to the masses. They relay on the funds of the citizens who invest with them for monthly interests to carry out their projects. Someone low on funds can save with them until the amount is enough to buy their own home. Alternately someone can ask for their money back plus interest at the per-agreed time.
     
  6. pwarbi

    pwarbi Senior Investor

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    While it's a good way to earn money, I'm too sure about the ethics of lending like that. You say they can't get finance through usual methods, that tends to suggest that they'll have bad credit history and the banks won't touch them.

    What your effectively doing is charging them over double the lending rate, because you know they are desperate, and will probably have no choice but to accept.

    Like I said, it's definitely a way to earn money, but I'm not sure I'd be comfortable doing that.
     
  7. Corzhens

    Corzhens Senior Investor

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    Private lending to house mortgage is not a good idea. What if the borrower couldn't pay? You cannot simply forfeit the property in your favor. The first problem would be how to eject the buyer since they are living in the property. For sure they will fight with tooth and nail to hang on. Secondly, they will file a motion to stop you from seizing the property. Being capable of paying is different from willingness to pay. And when something bad happens to the buyer, the problem will be passed on to you.
     

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