GRANADA HILLS, Calif., Sept. 17 /PRNewswire/ — Four Months Ago, Bob Edleson, a private investor in real estate loans, was having difficulty keeping his money invested. “There just weren’t enough good loans to invest in.” Today, with many subprime lenders not making loans, Bob has a wide choice of loans in which to invest. Bob is a “private money” or “hard money” investor. From individuals with just 30,000 invested, to those who invest millions, they loan to borrowers whose credit or property doesn’t meet the conditions of institutional lenders.
Where these borrowers may not have the credit scores, income or assets that institutional lenders require, they’re carefully evaluated on the basis of property equity, and borrower’s willingness and capacity to repay.
There are three key advantages that have positioned private money lenders to prosper in this market.
In evaluating a loan request, subprime lenders frequently rely on automated approvals that are generated through internet websites and based primarily on credit scores. Private lenders normally evaluate each loan request, often with highly experienced individuals making the approval decision.
Subprime lenders often rely on appraisals that were ordered by a commissioned loan broker. The broker ordering the appraisal (who the appraiser may depend on for future business) could influence the appraiser or select an appraiser who may inflate the reported property value.
Private money lenders generally control the appraisal process, often ordering their own appraisals, or carefully reviewing the appraiser’s work for accuracy.
Subprime lenders frequently loan as much as 100% of the appraised value of a property, Private money lenders often limit their loans to 65% of the value or less. Mortgage lender/brokers regulated by the Calif. Dept of Real Estate, for example, are cannot offer their investors a loan that exceeds a conservative percentage of the value of the property.
This extra equity not only provides motivation for the borrower to keep the property, but also provides some margin of safety should the lender have to foreclose.
The collection of payments and monitoring of changes in the loan is referred to as loan “servicing.” Where a subprime lender might send the loan to an outside servicing company in another state or even in another country, most private money loans are serviced by the maker/arranger of the loan, giving them direct control of the collection process, as well as the service the borrower receives. Under this arrangement, the private investor doesn’t have to interact directly with the borrower and benefits from the expertise of the mortgage company that made the loan. Research has shown that loan collection results are improved by a “hands on” approach to servicing.
Even real estate investors who directly owned rental property are turning toward private money lending. Flat or declining property values cause them to suffer an immediate loss as direct owners of property. When making a 200,000 private money loan on a 325,000 house, a 20% drop in value (to 260,000) means there’s still 60,000 in protective equity- (The 260,000 value less the 200,000 loan.)
How should an investor go about investing in trust deeds? First, it’s critical to develop a basic understanding of the process. There are free booklets available on trust deed investing from regulatory agencies such as the Department of Real Estate. ( http://www.dre.ca.gov ) Mortgage companies that make these loans usually will provide free educational information to prospective investors. The subprime crisis spells opportunity for careful investors who are willing to do a little extra homework in this lucrative area.
Joffrey Long is the President of Southwestern Mortgage, located in Granada Hills, CA. Southwestern Mortgage is a maker/arranger of private money loans. Joffrey is also the 2007-2008 President of the California Mortgage Association, the primary trade association representing lenders and brokers involved in private money lending.
He can be reached at SouthwesternMortgage (at) socal.rr (dot) com
SOURCE Southwestern Mortgage
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