Funding private loans

[calmloki]

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Originally Posted by CybrMike Thanks for the info. I'm in Indianapolis and we don't have many 4-unit buildings or 8-unit buildings. We have some doubles but they are mostly in bad areas. We also of course have 100+ unit apartment complexes but not much in between. For now I've been buying up single family homes since I'm getting them for $20K and $30K and renting them for $700 - $800 per month. The return there is phenomenal and I've got very cheap labor to fix them up and deal with the maintenance headaches. I probably wouldn't want to deal with it otherwise since most of the houses I buy need $5 - $10K of work. I'm getting ready to start branching out into properties that are going to rent for $1200 or $1300 a month. I just looked at one the other day listed for $87K and needs maybe $25K of work. This property sold for $154K 2 years ago. Hoping that I can have $100K in it when its ready to rent out. We'll see if they'll let it go that cheap (its bank owned).

In your case i'd be buying the heck out of the little places - home values here are still at about 100xmonthly rent at the very very best - think that when we were buying apartments cheap we were at .60 -.75x100 total complex monthly rent at the best - and some of those were awful old and beat up. The thought of renting at a .33 multiple sounds like gold rush time! You and TheFed man - if you can handle the tenants and keep the buildings standing for a while i forsee mucho dinero in your futures...

[Kroeran]

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Originally Posted by canadianteddy When doing such mortgages we always personally inspect the properties and make effort to meet with the borrowers. This gives us a good indication of value. That may be simplistic starting point but essential. Often times we also request an appraisal of the property which is a cost to the borrower. Any costs to draw up legal papers are also a cost to the borrower and is indicated in writing prior to proceeding with the loan. Further, all discharge costs are also the responsibility of the borrower. Any terms and conditions of the mortgage such as a 3 month pre penalty clause, charges for NSF cheques, attendance for insurance issues and many other clauses are laid out in the beginning. Cost for foreclosure proceedings are also indicated and added to the ultimate payout should the loan go bad. Make sure you as the lender are named on insurance policies. Just some things we do. Hopefully this is helpful and the kind of info u may be looking for. If such legalese is dealt with in the beginning, should the property proceed to forecloser then the ending process is less stressful. Bookeeping, on a simple spreadsheet is not hard either.

This is something I have done (in Ontario). I have been winding out of it, but I still have a couple of boring and productive firsts on a commercial condo and a gas station.

My general advice is that this is like rock climbing or flying. You have to be detail oriented and not get complacent.

I would say ALWAYS get an appraisal. My big one mistake was taking my brokers word on it, and I placed a second mortgage bridge loan on a large property, just at the moment the borrower went nuts.

Then it turns out the broker did it as an off books loan so I couldnt sue her company. I could have yanked her license and had her suicide on my conscience. I could have sued the borrower and pushed a nut case over the edge, wondering when he was going to show up at the back door with a weapon. I eventually slowly backed out and only took a 50% haircut.

So, strict security regarding borrowers knowing where you live, or being able to figure out where you live.

Another trick...ask to see any leases on the property or ensure any verbal agreements are disclosed. I had one situation where the property was compromised by an agreement between the owner and the renter that he could live at a reduced rent for life....this was a payoff to the renter to get him to waive an objection to condoizing a rental property...he was the last holdout.

When getting into lending, you are going to be pressured by brokers and borrowers to do things that you shouldn't. High pressure sales and promises of big fast payoffs. If you are not a skeptical cool customer who knows how to say no, you are going to get into trouble. I had one such guy, who I barely managed to say no to. Years after I still get calls from the police who are investigating this guy for fraud against seniors.

At first you are going to have a few easy deals, taking in 10% plus, and getting fees every time the borrower passes gas. You will feel giddy. This is the time to buckle down and stay conservative and wary. Simple rule is to not place more than 10% of your stake in one property or with one borrower, because shiatsu WILL happen.

what is the saying...there are old lenders, bold lenders, but no old bold lenders - or my version...find the courage to do that dangerous but rewarding thing, but be the most cautious scared person doing it.

Oh yeah, and there is nothing more expensive than a cheap lawyer. Find out who is the meanest litigating reptilian sob in your area and get established as his client. Otherwise, in a fight, you may find the other guy has the best guns on this side.

I don't think this the sort of thing for a softy. In my quirky way, I try to be Christian person of sorts. It is very hard to do this hand to hand combat stuff if you are also thinking about keeping your soul intact. This is one reason I am backing out of this. Another way to put it, when placing a loan, think about how you are going to feel about foreclosing if it goes sour. It is better if you don't like the borrower.

Other ideas.

- try to impose the steepest amortization curve the borrower will accept, which builds owners equity (skin in the game) quickly
- if the brokers won't let you in, advertise directly in the paper, then shop for a junior broker to clerk the deal, if a broker is required (which is the case in Ontario)
- one of the best things I did was take a mortgage consultants certificate
- make sure the appraiser is arms length to the broker - pick your own guy

[Martha]

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Originally Posted by calmloki Nine places, 51 units counting the house we are trying to sell. To a great extent more is not that much more work - you're tied down anyway, so more places just makes it easier to spend the money on tools and supplies and easier to get a good relationship with painters & carpet layers & such. 40 units was probably a sweet spot for me - i was in better touch with my tenants and feel i gave better service - could be that i'm just getting older and crankier and have seen the same sad stories too often. For me, multi-units were a revelation - much easier to care for with a tiny percentage of the roof & exterior wall/unit. A vacancy in an 8-unit is of little consequence vs. a single family home going empty. We felt that though multi-units had better cash flow that the single family homes would be easier to sell. So that theory is not working out so well right now.... Exit strategy is a big problem. Our stuff is paid off and pretty depreciated out, so a sale will be a major tax event, leaving us with maybe 3/4 of the property value to generate income with. The Siren call is to roll the properties into bigger and bigger places, riding the income and depreciation, then dying and leaving heirs with a stepped up basis. No kids here and screw the heirs - let 'em make their own! That's why i've been doing property loans - the hope is that the interest income will replace the rental income and that loaning out money at higher rates on after tax value of the sold properties will be an emotion neutral replacement for landlording.

What we did was take money out of the individually owned properties and invest in big projects, like our latest, a 500 plus unit building in Phoenix. You have to put your trust in the diligence of others though. But the day to day work is nil.

Our other option, which we have some regrets at not following, was doing exchanges into bigger local projects. We missed out on two, where we could have exchanged into fairly significant properties that were large enough to have on site managers to take care of the day to day stuff. Unfortunately, deals were few and far between so we ended up on getting out, paying the taxes, and investing the money in other real estate deals and the market. We sold at the height of the market, but we also bought there, so who knows what would have been the best deal.

[calmloki]

Report regarding our private loans: things are getting sticky. The small loan office we have funded many of our loans through sent all investors/funders a letter saying they have run in the red the last four months and that borrowers aren't finding it possible to refinance. We have lent on the building they operate from, the borrower has gone bankrupt, and the holder of the second has filed (refiled since the bankruptcy filing) to foreclose. Result of that is that we should be repaid on our first position loan when the building sells. We continue to receive regular monthly interest payments.

The second position loan we made three months ago on the coast condo is not looking too good - the borrower's attempts to refinance his whole development are not going smoothly and we have received no monthly payments at all. Loan was to be repaid or extended on the 25th. Instead of payments we've had excuses and positive sounding emails. As old landlords we know that at some point one must stop meekly accepting blue sky and rainbows and show a little of the stick rather than the carrot. Have an appointment with a lawyer tomorrow to explore our options and maybe generate a letter. If the borrower does come into a bit of money I want him to remember us, if not we may end up buying out the first position loan and having a coast condo for sale. Don't really want an Oregon coast condo, but it looks better than our GM stock....

We had lent money to a real estate company up in Portland. Unsecured loan, but there were a bunch of suits and a nice office - that company has gone out of business. One of the owners of the business has continued to make the interest payments, albeit slowly, and has formed a new Llc to which he wants us to transfer the debt. That debt was due to be repaid on the 28th - figure we will discuss our options on that debt with the lawyer at the same meeting.

We've had the opportunity to invest in other loans lately but have not done so - if we do have to foreclose on the coast condo we need to have enough cash on hand to cash out the holders of the first. That need to have cash idling rather than earning is a strong argument against holding second position loans.

Other loans continue to pay as agreed, which is a good thing, and the rentals keep staying full - sure is good to have that regular income keep chugging along as the property loans are generating a little more concern than I had hoped to have.

[Kroeran]

after many adventures in this game my conclusion is that seconds are not worth the extra risk, unless you have a large pool with lots of diversification or you also have the first, and never ever do unsecured unless you are getting a loan shark level of return, but you have to ask yourself if you want to be in that sort of business.

I would also follow the schiller real estate index closely and pull back when markets are overvalued or things are crazy...like now.

oh yeah, and don't permit the borrower to stack any seconds or thirds on top of your first or second, to keep skin in the game.

I think I would as well have a divorce escape clause - if the borrower has a change in marital status, loan is immediately due.

and ask for a very steep amortization

[calmloki]

Progress report: the coast condo loan has still not made any payments. Have spent about $1500 with a lawyer who did a demand letter, ordered a "foreclosure guarantee" (like a title report), and has set up the courthouse steps sale to come in February 2010. We have spoken with the holder of the first, who would much rather let this loan drag out - he has his eyes on the default rate interest and little dollar signs are dancing - OK for him, but the property would only have to sell for $120k for him to get paid in full - in the second position we need it to sell for $250k or so to cover our loan, interest, and legal expenses. We had held off on starting the foreclosure process for a month after the date the loan was due, hoping not to have to go through the process and trying to avoid waste of money - unfortunate. Still feel that the property is plenty adequate security for our loan, so this is serving as a learning experience for us.

[CybrMike]

Yikes. Will you bid @ $120K and get the property? What if the property sells for somewhere between $120K and $250K, do you just eat it?

Quote:

Originally Posted by calmloki Progress report: the coast condo loan has still not made any payments. Have spent about $1500 with a lawyer who did a demand letter, ordered a "foreclosure guarantee" (like a title report), and has set up the courthouse steps sale to come in February 2010. We have spoken with the holder of the first, who would much rather let this loan drag out - he has his eyes on the default rate interest and little dollar signs are dancing - OK for him, but the property would only have to sell for $120k for him to get paid in full - in the second position we need it to sell for $250k or so to cover our loan, interest, and legal expenses. We had held off on starting the foreclosure process for a month after the date the loan was due, hoping not to have to go through the process and trying to avoid waste of money - unfortunate. Still feel that the property is plenty adequate security for our loan, so this is serving as a learning experience for us.

[calmloki]

Quote:

Originally Posted by CybrMike Yikes. Will you bid @ $120K and get the property? What if the property sells for somewhere between $120K and $250K, do you just eat it?

If the bid was for 120 to 250 we would take a loss. The assumption is that it will be worth more, so our bid will be for the amount to pay off the loan (including penalty interest ) on the first + our loan + interest + legal expenses. Hopefully someone will bid more, which excess would go to the borrower. If no one bids more we just bought a beach condo - after we pay off the first loan in full. Which means dipping into the pocket to save the value of our loan. Of course if beach front condos are going for 120 in February and we don't think property values will rise again we may just kiss that initial loan money goodbye. Think that's how it works.

[jdw_fire]

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Originally Posted by calmloki If the bid was for 120 to 250 we would take a loss.

dont think you necessarilly take a loss, only if you are unwilling to take back the property. you should be allowed to bid up to the full value of your mortgage plus expenses plus back interest plus the 1st mortgage without adding any more of your own money, provided the 1st is still in good standing

[calmloki]

Quote:

Originally Posted by jdw_fire dont think you necessarilly take a loss, only if you are unwilling to take back the property. you should be allowed to bid up to the full value of your mortgage plus expenses plus back interest plus the 1st mortgage without adding any more of your own money, provided the 1st is still in good standing

Loss in the sense that if it is only worth $120-150 and we are into it $$250 or so. The first was due, is in default (no payments either), and would have to be paid off, so we would need to do so to have the property in our name free and clear.

[jdw_fire]

Quote:

Originally Posted by calmloki Loss in the sense that if it is only worth $120-150 and we are into it $$250 or so. The first was due, is in default (no payments either), and would have to be paid off, so we would need to do so to have the property in our name free and clear.

well then i hope you have the cash to payoff the 1st (or that you can get a new 1st) but, getting back to the forclosure sale, i dont think you can accurately judge the FMV of a property by its selling price at the forclosure sale since the buyers there are looking to buy at a discount.

[tryan]

In MA condo fees and taxes come before the first position .... yup, condo fees!

I sure your counsel knows local law; these things really add up fast.

If they're not paying you; who else are they not paying??

[calmloki]

End of the year - for those with any interest in how my heathen flouting of "neither a borrower nor a lender be" is going the following is offered.

The second position loan we made on the spiffy beach front place is done - borrower never made a single payment so we got to have far more conversations with a lawyer than I ever wanted (funny how $175/hour affects my friendly chatty nature). Found out there was no flood insurance on the low bank beach front place - couldn't get any without the borrower's signature, and the insurance company was only interested in writing for the whole building, since the borrower was the putative owner. Fire insurance on the unit expired, which we paid to re-up. Found out that if one puts money into a fire insurance policy held in another's name, even if you are a lien holder, the insurance company won't give you the money you paid back. Paying the lawyer was worthwhile: after racking up thousands of dollars in charges, which we paid each month, the borrower's note was purchased pre-foreclosure by another daring investor. We were paid for all expenses and interest and penalties. The note we signed happened to have a default interest clause of 22% in it. Which we got. and the trouble was worth every nickle of same.

A small loan we have carried for the last 5 years matured - we didn't have any default interest provision, so when the loan got to the end of term it took the borrower several months to pay it off - she just paid the agreed upon modest interest rate till she paid in full. Not what we had in mind, but the idea that someone wouldn't pay their obligations when due didn't spring to mind 5 years ago - back then we thought a foreclosure happened pretty much instantly. We need to have a penalty in place in loan documents to encourage people to pay off loans at maturity.

The loan that we had on our lenders building was foreclosed by the holder of the second. They still have an obligation to us, and are paying the normal payments - when I suggested they pay me off they told me to go ahead and foreclose - no real point in my doing so unless I want to enrich the lawyers - the loan matures in late February next year and they are trying to sell the place currently - we would be paid out of the sale proceeds. If we don't get paid off at the due date we'll go ahead and start foreclosure, till then the interest payments are just fine.

The loan on the 5-plex paid off this month - we had a minimum one year term on that 11% loan and the borrower got conventional financing - good for him getting a lower interest loan and good for us putting a minimum term on the loan. It's not worth the trouble and the risk to make a really short term loan unless its at eyebrow curling rates.

Our neighbor didn't pay off their loan - OTOH, they are super punctual with their payments and we can keep real close tabs on their comings and goings. Happy with the interest they are paying, admire how they are conducting their lives - no stress, no problem.

The loan we made to a bunch of suits in Portland - unsecured - continues to be a thorn in my side - we did get a month of interest in December, but that was after about 5 skipped months. At some point I may turn loose the law dogs, but as an unsecured loan its real possible that we could be throwing another $3000 or so away and gaining nothing. Lesson, get security idgit!

We did take the payoff on the 5-plex and make a new loan today - first on a duplex in Portland and a second on a small house as co-security. 11% interest, 5 year term, 3% interest penalty for prepayment in the first year, 22% default interest. Failed to put in a penalty for failure to pay off in full when the loan matures, maybe next time.

All in all, pretty entertaining and except for the unsecured loan's non-performance fairly lucrative.

[haha]

Quote:

Originally Posted by calmloki All in all, pretty entertaining and except for the unsecured loan's non-performance fairly lucrative.

This is quite interesting. Can you tell us what the all-in project profit or loss is right now, making conservative assumptions about the non-performing loan?

Ha

[calmloki]

Quote:

Originally Posted by haha This is quite interesting. Can you tell us what the all-in project profit or loss is right now, making conservative assumptions about the non-performing loan? Ha

It's an ongoing process right now and depends on how it's figured. For instance, should I include the $120k held in a MM account at 2% in case we needed to cash out the holder of the first on the coast property? Should the 7% contract we are carrying on our old house be included? How about the 22% default interest we just collected for a number of months on the non-performing coast loan? The loan we made to the suits in Portland managed to make 12 payments since 9/15/2007 and now owes $3000 more than we loaned them - but will we see our money back?

A middle of the road guesstimate - leaving out the uncommon 22% default interest and the old 7% contract and the poorly earning cash we hold in MM accounts, but pessimistically assuming we see no further payments on the loan to the suits we will make a weighted average 8.54% on the money we have loaned out at present. If the suits pay we should see 10%+. We are pretty staid - we hold a chunk in Penfed CDs and money markets, so the property loans juice up the 2-4% earnings in those accounts.

[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.