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Old 20 October 2017, 08:53 PM   #1
ejvette
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Investing in private mortgages

Any of you seasoned investors out there have any experience in private mortgage funding? I'm looking for an alternative investment and there are a ton of companies on the web that do private short term mortgages to real estate investors/flippers. The interest rates run from 6-12% depending on the property and risk level. Looks like the servicing company takes 10% of the interest as their servicing fee. Any thoughts on this?
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Old 20 October 2017, 08:56 PM   #2
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Interesting thread... subscribed.
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Old 20 October 2017, 08:59 PM   #3
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I think the average investor has enough exposure to real estate if they own their own home.

I'm not sure of your situation but for me I look to diversify.
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Old 20 October 2017, 09:09 PM   #4
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Sounds like a scam

Flipper/"Investor" -- mortgage is secured by the property, so their only skin in the game is the equity...but even that could have come from friends & family... or maybe there are also websites that arrange "private real estate equity funding"

Servicing Company -- That fee is insane. Servicing fees are normally less than 0.5% of the mortgage payment, not 10.0%

You -- Taking a big risk. Borrowers are people who already went to the bank (probably many banks) and got rejected
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Old 20 October 2017, 09:35 PM   #5
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The only useful advice I can add, speaking from experience, is that usually, the private mortgage are second or third in line after the first mortgage, which typically is a bank or a dedicated lending institution. If the investment goes belly up, you are in line as a second or third. Your chances of recuperating your funds become much more challenging. I dont think I have come across an investor looking for a first mortgage through private. So, its not as good as it seems.
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Old 20 October 2017, 10:26 PM   #6
Etschell
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better investment is an apartment building. i wouldnt hold a mortgage unless it was in 1st position and the equity was equal to the debt.

returns sound nice until you eat into principal.
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Old 20 October 2017, 10:38 PM   #7
ejvette
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My understanding is that these private mortgages are 1st positions with a debt to equity ratio of under 65%


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Old 20 October 2017, 10:58 PM   #8
Etschell
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My understanding is that these private mortgages are 1st positions with a debt to equity ratio of under 65%


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you really want to deal with a potential foreclosure? costs money and time. plus then you have to try and sell and unfinished home and with closing costs you are out another 7 percent.

but it is your money not mine. i am sure you can make a decent return just not where id want to be. espeically with asset prices inflated.
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Old 20 October 2017, 11:16 PM   #9
jhilly8982
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Are you talking about sites like
fundrise.com or realymogul.com?

I looked into this. I was not interested. Most of the debt obligations your funds would be used for are secondary and the return wasn't in line with the risk, IMO.
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Old 21 October 2017, 12:00 AM   #10
mfer
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My understanding is that these private mortgages are 1st positions with a debt to equity ratio of under 65%


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I would question why someone with that high of equity would need at 12% loan.
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Old 21 October 2017, 12:09 AM   #11
Dan_lie
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I currently borrow from funds to develop.

Charges on a first mortgage usually between .9% - 1% per month and sometimes a 1.5% entrance fee and a .5% exit fee. Usual lending terms are between 9-24 months.

On mezzanine loans, funds usually charge between 16-18% pa.

Its quite secure for the lender due to cross collateralising and personal guarantees.

First charges usually run you into 75% LTV and then secondary ones up to 90%. You could get a lot more cross collateralising as far as other assets go.

Before people say its a ludicrous amount to pay, when you are offered a great deal they don't stick around more than a few days and these funds are very fast to move and make decisions, especially when you have a good track record with them.

It is expensive but ROC is high due to the leveraging. Normal lenders will not lend on the expensive stuff so fast, especially when you are tearing it down to rebuild.

These funds are not in the foreclosure business and only really lend in super prime locations. Just because they are fast, doesn't mean due diligence isn't carried out.

Also most of these funds are based in countries with tax advantages too.
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Old 21 October 2017, 12:18 AM   #12
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I'm in the residential mortgage business, however, I can't comment on larger companies that are using your money to loan to flippers.....Instead I would look around in your local market to see if you know someone or someone you know well knows someone that may put deals like this together. A friend of mine and I have loaned money to flippers and or people that need short term financing until a "permanent" lower rate solution is available. I always want there to be an exit strategy for the borrower. I don't want to foreclose and I don't want to hope that the borrowers can't pay and I get the property back. We are always in first position. There is a market for "bridge financing" to A borrowers at rates in the 5-8% range as banks don't want to loan money that short term but most people with money to lend don't get excited about 5-8%. I have thought about putting a small fund together for these short term deals with a clear exit strategy but have not spent the time to do it. With anything due an extremely thorough due diligence.
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Old 21 October 2017, 12:31 AM   #13
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Quote:
Originally Posted by 520Matt View Post
I'm in the residential mortgage business, however, I can't comment on larger companies that are using your money to loan to flippers.....Instead I would look around in your local market to see if you know someone or someone you know well knows someone that may put deals like this together. A friend of mine and I have loaned money to flippers and or people that need short term financing until a "permanent" lower rate solution is available. I always want there to be an exit strategy for the borrower. I don't want to foreclose and I don't want to hope that the borrowers can't pay and I get the property back. We are always in first position. There is a market for "bridge financing" to A borrowers at rates in the 5-8% range as banks don't want to loan money that short term but most people with money to lend don't get excited about 5-8%. I have thought about putting a small fund together for these short term deals with a clear exit strategy but have not spent the time to do it. With anything due an extremely thorough due diligence.

+1

How big of a team- LO's do you have in Tucson?
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Old 21 October 2017, 12:34 AM   #14
Dan_lie
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A fund is extremely complicated to form legally and requires external administration and government compliance.

Some funds are easier to open but still need fund managers and auditors and all documents recorded by the regulating authorities. I think the easiest fund to open is a closed ended fund which has less than 50 investors (Still complicated and expensive to form). Most expensive being a collective investment scheme.

Administrators would charge a percentage of money under management which would have to be factored into and along with other costs for returns to investors.


Another thing to note is that most lenders usually roll the interest into the loan upfront.
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Old 21 October 2017, 04:05 AM   #15
CamSLC
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I've been involved in private real estate/secured lending for a little over 5 years now. I don't use any servicing company's or funds. I have reliable and well connected real estate attorneys that I run a majority of my deals through. The others are through local banks that hit lending limits with certain clients. I will partner with them and bring the additional capital. We lend on flips, 30 year track record home builders, commercial, and land development/paper lots. I also currently have 4 joint ventures with three separate developers with over 150 homes being built. I've found those to be the most lucrative and hands off endeavors.

I've foreclosed, bought out positions, lost a little money after liquidating failed projects and had some people pay late. All considered I couldn't imagine sending my lending portfolio over to a fund. They would without a doubt be less conservative, more amicable to the borrowers and take a much larger % from my bottom line.
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Old 21 October 2017, 05:19 AM   #16
GB-man
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Quote:
Originally Posted by etschell View Post
better investment is an apartment building. I wouldnt hold a mortgage unless it was in 1st position and the equity was equal to the debt.

Returns sound nice until you eat into principal.
+1
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Old 21 October 2017, 06:21 AM   #17
ejvette
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A lot of constructive comments here thanks guys
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Old 21 October 2017, 09:37 AM   #18
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Quote:
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better investment is an apartment building. i wouldnt hold a mortgage unless it was in 1st position and the equity was equal to the debt.

returns sound nice until you eat into principal.
True
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