Funding private loans

[haha]

Thanks Calmloki. It see that is is quite hard to really know where you are while still in midstream.

Ha

 

[Kroeran]

with direct real estate lending on seller take-backs or placing first or second mortgages through a real estate lawyer or mortgage broker, it gets very up close and personal, and you have to have the capacity to move rapidly and viciously when a loan starts to sour.

I am too much of a softy for that, which is why I stopped doing new loans a few years back...which by luck, reduced my exposure during the financial crisis.

as far as sitting in lawyers offices, you have to learn that you are in financial war at that point, so you better have the smartest meanest guy in town for all those dollars you are laying out, not the pleasant fellow who works out of the office conveniently down the street.

these are the rules I developed in my 5 year sub-prime lending "phase", and each one of these rules is very very important

- never have more than 10% of your stake in one property or with one borrower...you can manage risk, but you can't really know which deals are going to go sour, and deals WILL go sour. Make sure the contract is structured so that when things do go sour, hell and molton lava pours down on the borrower. If you are soft on this, you WILL get taken to the cleaners.

- make sure your broker, lawyer, borrower, inspector and appraiser are arms length and don't have ongoing referral relationships with each other, which would place their loyalty to each other above loyalty to you. There is huge pressure from professional referral networks to protect their lead sources and an industry bias toward formation of these groups, with YOU being the odd man out when things get rough.

- make sure you see each professionals paperwork on each deal to ensure they are putting it through the system and maintaining errors and ommissions insurance coverage. You can't sue your broker if he screwed up if he didn't put the paperwork through the company and rather took some cash under the table from the borrower, which is what happened to me. You CAN have the broker's license removed, but that won't help your bottom line, and then there is the awkwardness of the broker saying she will commit suicide if you turn her in. You can't make this stuff up. Like I said, direct lending is up close and personal.

 

[Westernskies]

Just jumped into funding a private RE loan.

1. Developed building lot in a high-end community
2. Sold in 2006 (height of market) for $300+K
3. Foreclosed in 2010
4. Listed for 120K
5. Bank agreed to sale at 60K
6. Buyer is putting 30K down plus closing costs
7. We are funding 30K for two years
8. 10% interest rate
9. Interest-only payments
10. No prepayment allowed in first year
11. Deed of trust and mortgage note- we are first lien holder
12. Principal (ballon payment) due in 24 months

Our RE broker that we worked with on our home approached us- he manged to lock up the lot at 60K for his client, but bank financing fell through at rhe last minute- no one wants to do lot loans.

The lot is a primo view lot, hence the 300+K sale price in 2006. Most of the distressed property has been snapped up by investors, community situation seems to be stabilizing- there are a couple of new custom home housing starts.

First time we have done this, what am I missing?

 

[Martha]

Title insurance?

Make sure that your interest rate is a legal rate in the state where the property is located.

 

[calmloki]

Dixonge's "crazy RE" thread keeps reminding me of Real Estate. We've seen a whole $350 in interest payment this year from the Portland Suits loan. Haven't sent a lawyer after them, haven't negotiated for partial payback, have had occasional long winded calls from the primary explaining all the big deals just about to come down the pike. Sigh. Get the feeling that at some point we'll be writing that loan off - hope to write it off against taxes.

The loan we made right at the end of last year has been paying regularly, the neighbors we loaned to have sold their property and I expect to be paid off this coming week. Also in the coming week we are set to make a loan to another investment company - we're taking a first on a Salem duplex. Their business plan involves buying really cheap, fixing the property up, and flipping. They borrow as much as they can to maximize their ROC. Since the amount we are loaning on the duplex is less than we would pay for it it seems like a good deal.

Must say, the people and properties looking for money are not as attractive as the last couple years - we are looking at maybe 8-10 places before lending. Takes very little time to discover, for instance, that an 8-plex is only legal for 5 units, or that the borrower is running on the money from her last 3 law suits...

We paid a bunch of bucks to have a lawyer look over a loan agreement we patched together from 4-5 other agreements - he re-phrased it into something that is the most hostile,vicious, scare-the-borrower-away document I've ever seen. Used it with the December loan, and the borrower has been very prompt, which is good, but several other borrowers have been run off.

We are also trying to loan only on investment properties rather than owner-occupied. If we got into a foreclosure situation I druther not throw the ol' widder woman out into the street. Also think the courts are loath to do so and think laws will be moving in the direction of greater impediment to those evil lender types trying to make money.

Not as much money lent out should mean less money made this year - made a purchase offer on a weird place that needs a bunch of work and money - down the road it could be worth the investment, till then it could give us something to do and be a pretty cool place to hang out.

 

[Kroeran]

Dixonge's "crazy RE" thread keeps reminding me of Real Estate. We've seen a whole $350 in interest payment this year from the Portland Suits loan. Haven't sent a lawyer after them, haven't negotiated for partial payback, have had occasional long winded calls from the primary explaining all the big deals just about to come down the pike. Sigh. Get the feeling that at some point we'll be writing that loan off - hope to write it off against taxes.

when they get into trouble, they will try to snow all the creditors, and just pay the ones that play hardball

this is the hard part where you EARN the high yields on the overall portfolio

the longer you postpone taking action, the worse things will be

make sure you know the tax consequences of whatever course of action you take

I spent 60k on negative cash flow keeping a 180k second mortgage alive by attorning (one step before foreclosure or power of sale) the rents on a $2m dollar 42 plex until the owner managed to sell the place (which only happened after I initiated power of sale), which was registered as a capital loss for tax purposes, which is useless to me, as I only do fixed income.

take care not to do small loans on large properties - making the 20k monthly mortgage payment on that 2m property scared the bejeezus out of me - on a smaller scale I could have done a quit claim or been braver in negotiations. On closing day, the seller AND the buyer started making demands.

 

[calmloki]

Could be I'm getting snowed, but the Suits no longer have an office - only the one Principal is still in contact and trying to keep the business name alive. It could be argued that the corporation is solely responsible for the debt and that the principals did not take personal responsibility for the debt - that argument could be costly in court. A legal victory if there are no assets to attach would be phyrric. We still have a major chunk of our income from our rentals, which are taxed as ordinary income, so a loss on the lent money could be written off - I think and hope! Taking the loss locks it - any interest payments made before then are bonus, and maybe, just maybe, that principal will do as he says he wants to do and pay back that debt.

Last fall when we had to start foreclosure on the coast condo it was pretty irksome paying the insurance and our lawyer about $1500/$2000/ month - $20k/month would get me real excited! Although we did collect high default rate interest during the foreclosure process it was no fun.

when they get into trouble, they will try to snow all the creditors, and just pay the ones that play hardball

this is the hard part where you EARN the high yields on the overall portfolio

the longer you postpone taking action, the worse things will be

make sure you know the tax consequences of whatever course of action you take

I spent 60k on negative cash flow keeping a 180k second mortgage alive by attorning (one step before foreclosure or power of sale) the rents on a $2m dollar 42 plex until the owner managed to sell the place (which only happened after I initiated power of sale), which was registered as a capital loss for tax purposes, which is useless to me, as I only do fixed income.

take care not to do small loans on large properties - making the 20k monthly mortgage payment on that 2m property scared the bejeezus out of me - on a smaller scale I could have done a quit claim or been braver in negotiations. On closing day, the seller AND the buyer started making demands.

 

[haha]

This is apparently a real business, with all the attendant opportunities and hazards. Good luck to you. It seems quite difficult and time consuming and also perhaps hard to foresee all the poop that eventually could wind up in the fan. On the other hand one is developg a person experience database which can only get stronger as time passes.
Ha

 

[Kroeran]

only the one Principal is still in contact and trying to keep the business name alive. It could be argued that the corporation is solely responsible for the debt and that the principals did not take personal responsibility for the debt - that argument could be costly in court. A legal victory if there are no assets to attach would be phyrric..

once you start lending, brokers and lawyers and clients will start pitching you tempting deals, like, "lend me 100k for 2 weeks and win 10k bonus". There are some bridge loans out there where this can make sense.

until you get a deal that goes sour, you start to feel increasingly invincible. Happened to Donald T.

If you made an investment (loan) to a company that was not personally secured or secured against assets...well, that is something I have done and learned to regret...part of the tuition of education.

also, the pressure will be there to do quick deals with skimpy paperwork. On my deal gone bad, turns out my broker had put it through for cash with no paperwork, so I could not even sue her firm for negligence (the appraisal which usually is done without me checking was not done...as this was supposed to be a 2 week turnaround). My only recourse was petitioning for the liscenses for my broker (and the lawyer too who also did work for the borrower)

last thing I want is a group of grouchy savy homeless types wandering around poisoning my dogs or worse, so I stepped away and took the hit. Overall I came out ahead with lending and had some adventures, especially the part of managing and collecting rent on a 42 unit slum. A lot of life goin on in one of those places, and my heart skips a beat every timme I drive by the place. There is probably a book in it.

Here is my cheet sheet for private lending:

1) have a contract where hell rains down on the borrower if they so much as sneeze - you can then decide how merciful you wish to be when stuff happens
2) spread your deals among different borrowers...never 2 loans with one guy
3) never have more than 10% of your stake in one deal
4) never use the lawyers broker or the brokers appraiser - you want pros that don't like each other and will rat each other out - otherwise, you become the sucker at the poker table
5) there is nothing more expensive than a cheap lawyer - find the scariest meanest real estate sob in town
6) make it impossible for ANY of the players to know where you live or who you are - first name only
7) that being said, meet personally with the borrower and walk the property
8) only lend on properties you could cope with owning suddenly
9) be prepared for the emotional aspect of power of sale/foreclosure and only lend to individuals you are prepared to foreclose on
10) talk to neighbours on four sides of property - do all the stuff you would do if buying the property
11) do not permit 2nds, 3rds to be added on top of your first, second - ensure the borrower has skin in the game
12) just do first mortgages - a 2nd puts the total bet at risk, with a first, its virtually impossible to lose the whole bet
13) interview the tenants and take a copy of the lease - look for weird clauses (I got caught with a loan on a property that had a baked in below market rent, which suppressed the property value below the presumed value...a holdover from the condo conversion process).
14) set payments up as automatic bank transfers - bank calls you if there is an nsf
15) loan is due if borrower gets divorced or separated.
16) have a very steep amortization (short period ie 10 years)
17) have mortgage in a vacation area - deduct travel to that area against the loan interest (annual inspection of security property!)
18) work with more than one broker - ensure that broker is successfull (and not recently bankrupt, which I did not find out until after my bad deal)

 

[haha]

once you start lending, brokers and lawyers and clients will start pitching you tempting deals, like, "lend me 100k for 2 weeks and win 10k bonus". There are some bridge loans out there where this can make sense.

until you get a deal that goes sour, you start to feel increasingly invincible. Happened to Donald T.

Nice Cliff's Notes. Why don't you guys try something genteel like skip tracing or bail bonds?

Ha