Funding private loans

[calmloki]

Looks like we are going to do another local property loan. 4.75 acres with a house and some outbuildings to be torn down. 7 miles from Salem, nice house on one side and a middle class++ house on the other, middle class+ neighborhood. Borrowers have 770 and 727 middle credit scores and a 16% debt ratio. They are buying the property for $240k, putting up 1/2 and borrowing 1/2, planning to clear off the house of no value and build.
We'll do a 30 year amortization with a 5 year balloon, 10% interest and a guarantee from them of a minimum of 6 months interest before they refinance (were i them i'd be looking to refi ASAP). The interest will be ordinary income, the risk is trading the $120k for a piece of land, but for me it seems somewhere between a cd and the stock market - and the 10% is kinda nice. Closing through a title company, the small lending company handles the collections and loan documents.
I'm just saying - for people who are comfortable with property, this might be a retirement income opportunity to consider.

 

[kumquat]

I'd consider it, if I had a property with an offer like that. Enjoy

 

[CybrMike]

yeah 50% down is a nice equity position to have. Just hope they default and you can sell it again

 

[youbet]

Looks like we are going to do another local property loan. 4.75 acres with a house and some outbuildings to be torn down. 7 miles from Salem, nice house on one side and a middle class++ house on the other, middle class+ neighborhood. Borrowers have 770 and 727 middle credit scores and a 16% debt ratio. They are buying the property for $240k, putting up 1/2 and borrowing 1/2, planning to clear off the house of no value and build.
We'll do a 30 year amortization with a 5 year balloon, 10% interest and a guarantee from them of a minimum of 6 months interest before they refinance (were i them i'd be looking to refi ASAP). The interest will be ordinary income, the risk is trading the $120k for a piece of land, but for me it seems somewhere between a cd and the stock market - and the 10% is kinda nice. Closing through a title company, the small lending company handles the collections and loan documents.
I'm just saying - for people who are comfortable with property, this might be a retirement income opportunity to consider.

Why do these folks need to pay you 10% for the loan? Why can't they do better with a commercial lender?

 

[calmloki]

Why do these folks need to pay you 10% for the loan? Why can't they do better with a commercial lender?

Good question. They are buying a foreclosure, cash out sale. Makes them willing to pay the small private loan company's $6000 loan fee as well as the 10% interest. People have lots of reasons for going with the small private lender - usually they have bad credit, or a bankruptcy, or a need for fast money. This place has decent land in a good area with a house and mobile home pad that should make building anew easier than starting with bare dirt, but the structures are crap and a bank's loan officer would have a problem with them.

My nose is in the air for a hint of the borrower having a litigious nature - we've rejected loans because of that - but as long as the security is one we would not mind owning at maybe 60-70% of value (cost to foreclose added) their reason isn't too important. We hope not to foreclose, but are somewhat prepared for it. Fast money, liquidity, is becoming a desirable commodity, even while cd rates are dropping. I like the short term nature of the loan - in this climate interest could be at 15% in a couple years - who knows?

There are risks, but the security and it's local, tangible nature are attractive to a couple of old landlords.

 

[calmloki]

Consolidating information from another thread's posts:
Originally Posted by clifp
How is the loan working out for you its been about 4 months right?

I also have a question about foreclosures. It is my understanding that for most forclosure the property is put up for public auction. The money recieved is first is use to pay off property taxes, workman liens, legal fees, then 1st , 2nd, 3rd mortgages. Any excess money goes to the property holder.

So using your example of 240K property if they default. The property is auctioned off for say $180K, you get your $120K+ fees and penalities but they get the remaining 40-50K. Is this correct? If so why do you want to foreclose?
The loans we've made (5-6) have paid every month on time just like clockwork - better than many of our renters! main complaint i've had is that they pay off as quickly as they can get refinanced, so none have gone to their 5 year balloon. Just had a 10 acre w/ mobile in Bend with real nice mountain views pay off at the 18 month mark. Our longest running is a $37k mobile home loan that reset on 7/2006 - it burned down, insurance paid with a check with our name on the check. We ok'd doling the money out to the borrowers as they replaced the old single wide with a much nicer newer double wide - which took the place on the loan of the original mobile. We now have a clause inserted in the contracts that says if the loan pays off inside a year there is a 6 month penalty.
Hope never to have to go through foreclosure, but we are the first mortgage holders. If the loaned on property isn't free and clear then the money we loan is first used to make it so - title company does that before or during closing. Only reason to foreclose is to clear the title and get the property in our name. or get our money. Only been to one courthouse steps property auction, and the bank that held the paper started with an opening bid of what they were owed.

 

[calmloki]

For the few who may be interested, the Bend 10 acre + mobile paid off in March after an 18 month term. Stuck the money in Vanguard Prime MM and have been watching the interest rate fall. Loans that our lending company has presented have not been compelling up till the most recent: 31.5 acres about 2 miles outside of Gates Oregon, zoned timber conservation, but with a county document allowing construction of a home. Super homesite, not a neighbor to be seen, lots of forest land surrounding it, stream & spring, scared up about 20 elk when we were checking it out. Current owner is facing his 10 year balloon. He paid $135k 10 years ago. He wants to borrow $157k to clear the title and build a home (his labor). Horrible income history, lots of bounced checks, lots of failure to follow through, nice guy but the irresponsible artist type. (In a curious twist of fate, several years ago he failed to pay for a stack of cups my potter honey had at his gallery on consignment - yup, that's gonna bite him on the butt.) The loan we are offering will have about $39k held in a trust account and doled out as he completes construction phases. - he will be paying interest on that money and the remaining $118k at 11%. We will be in first position with a new wrinkle: escrow officer is having him sign a Deed in Lieu of Foreclosure at closing and the title company will hold that. He will be required to make full monthly payments only, no partial payments accepted, 3 month interest penalty if he pays off within a year, 5% late payment penalty, and Deed in Lieu of Foreclosure gets filed if he gets 90 days behind on payments. This is an attempt to forestall a lengthy foreclosure.
If we're lucky he will keep up with his payments and we'll make a tad under 11% on our money. If we're lucky he will go belly up and we'll have a nice chunk of land worth maybe $225k + whatever construction he accomplishes. Won't bother me if we have to take the land and hold it for 5 years or so - no maintenance required. After running off some kids scrawling obscenities in our new concrete drive at some apartments and dealing with a toilet tank that mysteriously broke, and hunting the leak that is causing a kitchen ceiling to sag badly no maintenance is sounding really good. Even if the rents are going up and the rentals are throwing off cash like mad.

 

[Martha]

So your state allows a deed in lieu at closing to be held against future defaults? Wow. You would think every lender would get one. The states I used to work in did not allow it.

 

[calmloki]

So your state allows a deed in lieu at closing to be held against future defaults? Wow. You would think every lender would get one. The states I used to work in did not allow it.

I don't know if it's because this is bare dirt and not his home or if it's just an Oregon wrinkle, but it seems really cool (for us). Asked the escrow officer and heard that a few lenders did it so we jumped on board. Along about the end of the month we'll find out if the escrow officer gave us bad data. Won't have any effect on the borrower if he follows through.... he should have paid Sally for her cups - we're setting bear traps by his path.

 

[brewer12345]

calmloki, can you talk a bit about the loan company you use? How did you find them? How did you vet them? What is their take?

 

[calmloki]

Access GT Mortgage in Salem Oregon. When we bought the raggedy house we live in (after renovation) from the son of our deceased neighbor the son rushed out and sold the loan to GT Mortgage. Being cheap i would run our payments in to Dick and chat with him (GT was a one man show) - told him we would like to get on the other side of the loan agreement someday. We funded a few loans using Dick, then he sold to Access and vouched for them. I don't have the history with Access I did with Dick, and am real concious of the fact that they exist to make money for themselves, but so far it's working out. Would like to find another private lender to work with just to diversify a bit, but haven't had luck in the minor attempts i've made...

On this loan the broker who referred our borrower to Access is getting 1%, Access is getting 5% + $3150 in other lender & broker fees all paid by borrower, + $12 collection fee/payment split between borrower and us. Oh yeah - he makes out like a big dog with very little of the risk. Don't really want to become a loan company though, and am content with our share of the pie. If you find anything scary a heads-up would be appreciated!

 

[brewer12345]

No, sounds reasonable to me considering what is involved. I guess at this point 11% doesn't sound juicy enough for me personally to jump in the pool when I can buy bonds and bank loans at those kinds of yields, and still have some liquidity. But I am curious, since at some point credit may be tight enough to make this sort of thing attractive. Its a damn sight better than Personal Loans at Great Rates! Get a Personal Loan at the P2P Lending Marketplace - Prosper anyway.

 

[clifp]

Ah Prosper. A website with one of the most cruelly ironic names on the net. The way to become a multimillionaire on Prosper.com is to start with a Billion dollars and lend it out on via Prosper.com to deadbeats, frauds, and losers. More than 1/3 of my 37 loans have defaulted after a bit less than 2 years. Luckily the total amount lended $2500 is quite modest.

 

[calmloki]

Foo. The Gates loan didn't pan out. Taking a cue from Martha i bought some lawyer time - he was pretty negative about whether the deed in Lieu of Foreclosure would hold up to a court challenge, though he knows some are using them at loan inception. We got another years worth of tax returns from the potential borrower and just saw no way that he could pay back the loan - going into the loan convinced that we would have to foreclose opens us up to the suggestion of engaging in predatory lending - not what we want to do. We did offer to buy the borrower out, saving him from forclosure and getting first and second loan holders paid, but he didn't like our offer. Not very good - the borrower gets foreclosed, the old woman who has the second gets nada, the first mortgage holder has to forclose, and we are out the lost interest from moving money out of Vanguard Prime and whatever the lawyer charges. So. Not all beer and skittles in the private mortgage loan world - fun to try and put together though.

 

[brewer12345]

Foo. The Gates loan didn't pan out. Taking a cue from Martha i bought some lawyer time - he was pretty negative about whether the deed in Lieu of Foreclosure would hold up to a court challenge, though he knows some are using them at loan inception. We got another years worth of tax returns from the potential borrower and just saw no way that he could pay back the loan - going into the loan convinced that we would have to foreclose opens us up to the suggestion of engaging in predatory lending - not what we want to do. We did offer to buy the borrower out, saving him from forclosure and getting first and second loan holders paid, but he didn't like our offer. Not very good - the borrower gets foreclosed, the old woman who has the second gets nada, the first mortgage holder has to forclose, and we are out the lost interest from moving money out of Vanguard Prime and whatever the lawyer charges. So. Not all beer and skittles in the private mortgage loan world - fun to try and put together though.

Better that you find out now rather than after the ink is dry and the check has been cashed. Sometimes the best deals are the ones you skipped.

 

[clifp]

As Warren says investing isn't baseball, you don't have a set time to swing at the pitches. Trying to chase pitches is a losers game.

 

[calmloki]

Yeah - we kind of put a good hard push on making something work - if too many problems crop up it's kinda like the Cosmic Gazoo is telling us "listen up dummy - not meant to happen." Trick is to listen and not keep pushing. Lots of opportunities out there.

 

[calmloki]

Broken record here - but this is generating some money for us and seems like an alternative to the stock market that some few ER folks might want to explore.

One of our borrowers, who has been super regular making payments for some years now wants to borrow up to 65% of her current tax assessor's True Cash Value - would like to keep her current interest rate of 8.9% - it would mean an additional loan of $44k from us. While she has been a great payer i'm not real interested. More attractive is a new proposal - a couple with credit scores of 772 and 787 who bought a 29 room boarding house earlier this year - all cash - and now want to pull some cash back out. 10886 SF building on a 24,888 SF lot, 100% occupancy, and a block and a half from one of our places. It's a rough area - just recently evicted meth-boy from one of our units, and can imagine the clientel the boarding house attracts....
Tax man says the True Cash Value is $886,330 and they want to pull out $171k, a loan to value of 19.29%. They are looking for a 10% interest only loan, 5 year balloon. Loan company will ding them 5%, referring broker gets 2%. I'm going to drive in and look at the building today - this loan would about clean out our cash, but we would still have the PenFed CDs for emergency use, and the renters making their payments... My fantasy involves having a million out there loaned at 10%, with the checks coming in and no plumbing repairs, no rental showings, no meth-boy, no lost key calls at 2 AM, no stock market dips.... Thus far our biggest loss has been lost time and lawyer consultation fees on loans we didn't do - all the loans have paid as agreed. Aware that that could change and will be posting my whines here as well if and when..

 

[ERD50]

calmloki, my concern with that method would be diversification. Just a few loans, and all dependent on many of the same fundamentals. If those people can't get renters to pay, they can't pay you, etc...

It could very well work out for you, but the diversification thing makes *me* uneasy. If you are fine with it, then it's fine.

-ERD50

 

[clifp]

calmloki, my concern with that method would be diversification. Just a few loans, and all dependent on many of the same fundamentals. If those people can't get renters to pay, they can't pay you, etc...

It could very well work out for you, but the diversification thing makes *me* uneasy. If you are fine with it, then it's fine.

-ERD50

I agree diversification is my concern also. It would be nice if some enterprising firm took a bunch of these loans of a similar nature packaged them together and sold them to individual investors, that way if one failed I wouldn't have to forclose and risk losing $120,000. Basically bundle a bunch of debt obligations back with collateral, or a security backed by mortgages. They'd need a catchy name, can anybody think of one?

 

[calmloki]

calmloki, my concern with that method would be diversification. Just a few loans, and all dependent on many of the same fundamentals. If those people can't get renters to pay, they can't pay you, etc...

It could very well work out for you, but the diversification thing makes *me* uneasy. If you are fine with it, then it's fine.

-ERD50

Quite right - and we tried to diversify, really we did - we have a chunk of Wellesley, big bites of TSM and Emerging markets, a chunk of gold mining stock fund, some Bank of America, some Costco, some HP and a bunch of Johnson and Johnson - overall total is less than the amount of this loan, but still, overall down 18.4% since purchase, over $25k less than we have put in the market. And that's the stocks we still have - we've sold some winners and losers along the way.
While we aren't finding a horde of buyers for the places we would like to sell right now, which probably means we are too proud of them, they continue to rent. A major flood or tornado could zig-zag around and wipe them all out, or all the renters could lose their jobs and be unable to pay, but right now at this moment i like the idea that even if the renters all move out or the borrowers all go belly up and we have to foreclose - there is something left! I'm just too simple and like to be able to visit and touch my investment. Not giving up on the market, not selling and will probably buy some more as the near time goes by, but 10% looks realll pretty right now... For sure not for everyone though.

 

[ERD50]

... Basically bundle a bunch of debt obligations back with collateral, or a security backed by mortgages. They'd need a catchy name, can anybody think of one?

While I'm waiting for someone to come up with a catchy name ... umm, I'd be willing to buy up some of these. Not sure how I'd get a good measure of the risk of a bundle of loans, but what the heck - good interest rate, I'll probably do fine on average. What could go wrong?

I'm just too simple and like to be able to visit and touch my investment.

Definitely something to be said for that.

-ERD50

 

[clifp]

While I'm waiting for someone to come up with a catchy name ... umm, I'd be willing to buy up some of these. Not sure how I'd get a good measure of the risk of a bundle of loans, but what the heck - good interest rate, I'll probably do fine on average. What could go wrong?




Definitely something to be said for that.

-ERD50

I do think there is a lesson to be learned from your experience on the limits of diversification for reducing risk. In all seriousness, I would have been very comfortable purchasing a $120,000 worth of mortgage back securities. My due diligence would have been limited to checking out the credit rating of the securities perhaps looking at the past payment history of similar security. However, I would have uncomfortable with committing the same amount amount to a single loan. I would have done a similar thing as Calmoki, get an another appraisal of the property, insist on a large amount down, and double check the credit rating of the borrower.

Clearly in hindsight your approach worked out because you did much of your own work rather than relying on the assurance of others. (Actually to be fair the only MBS I own is the Vanguard GNMA which has held up well, but then it only pays 5% interest.)

It is a pity I am complete out of cash, but I think it worth a serious consideration as an asset class. I'm very encouraged that people are willing to pay 8-10% while maintaining a LTV less than 80%. I am not sure why a banker would not jump at these loans.

 

[calmloki]

Did a drive by on the property and what little weekend digging into the background i could - turns out the original portion - over 1/2 - was built in 1952 and whole thing was a nursing home up until early this year. One possible wrinkle is that last year a variance was granted to the nursing home allowing it to have 9 rather than 29 parking spaces, said variance to be void if the use changed. Need to dig a bit and see what boarding houses are allowed for minimum parking spaces. OTH, it may not matter a whole bunch - the borrower has far more to lose than i if the loan is 20% of RMV and the property is free and clear.

Found one of the current owner's ads:

"I have a 11000 Sq ft house that I rent the rooms in. The house has 29 bedrooms, 6 full baths and 6 1/2 baths. there a very large shared kitchen with two Gas stoves, dishwasher,two micro waves and two fridges. large formal living room with gas fireplace and direct TV. formal dinning room, a family room w with direct Tv. We have two washers and two dryers. This is a gay friendly home, couples welcome for a extra 100.00 a month to cover utilities. We also wheel chair accessable...
Apartment Features: Air Conditioning, Balcony, Dishwasher, Fireplace
Community Features: Laundry Room"

Looks like if fully rented his gross is $9735/month and he provides all utilities.

 

[calmloki]

In keeping with reporting bad as well as good news on funding what are called hard money loans as a retire early income source: seems like the parking issue i found on the web for the above property may be a deal breaker. I sent the little loan company this: "..did a drive by this weekend and talked w/ Sally (she's down south and arriving at PDX at noon today) - looks real good - it's a block and a half from some units we own on the corner of 5th and Locust. Did find one little thing - a parking variance granted to the nursing home last year that goes away if the use changes: http://www.cityofsalem.net/export/departments/citygov/staff_reports/2007/080607/4.3m_001.pdf ".

The loan broker called the city and unfortunately got them all stirred up - turns out the variance did go away and the borrower was doing an unpermitted use running it as a boarding house. He can get a variance to run a boarding house, but only for 6-8 units. Don't think that will cut it as far as generating enough income to support the loan we were thinking of doing. Sort of sorry the broker called the city - probably better to know now, but i sure had no intention of breaking the borrower's rice bowl - the info was on the web and handy to anyone who plugged in the address of the property.

Guess the take away is to do a bit of research before dropping the money. Just like any other money making venture. Still like doing local property loans - just need to do the right ones.