Today I want to talk about how an experienced mortgage broker can help private lenders and investors manage risk and preserve their capital in the process.
As private mortgage brokers, we are continually completing risk assessments on deals for financing and placing the deals through one or more of our private mortgage lenders.
And in a perfect world, all the payments are made on time once the mortgage is funded and there never is any issue with the borrower right through to and including the repayment of the mortgage in full.
But unfortunately we do not live and work in a perfect world and sometimes, despite our best efforts, there can be issues and challenges with a private real estate loan or mortgage that’s been put into place.
In a perfect world, we try to avoid foreclosures and collection actions as much as possible, and for the most part we are highly successful in this regard.
But when problems with repayment do occur, the conservation of capital comes right back to the risk assessment.
What that means is that we are always looking to fund deals in liquid markets.
So for instance, larger urban cities of one million people or larger will always provide a market for liquidation.
Where liquidity is lower due to factors such as smaller market size, we compensate for that through the loan to value that can be provided.
An example of an unexpected default scenario is in the case of a divorce where there is lots of equity in the property, but both sides are at odds with each other and no one is making the mortgage payments.
When a default does occur, in many cases the mortgage broker will do all the coordination related to repayment, relying on the strength of his or her risk assessment to either facilitate getting the borrower to get the mortgage back on track, or facilitate the foreclosure process.
In either event, the worst case scenario for the lender is that they may not get their capital back in the initial time period outlined in the terms of mortgage, but they will get all their money back in time due to the equity in the property and the liquidity in the market.
A proper risk assessment will allow broker and lender to preserve capital regardless of circumstance due to the legal rights afforded by mortgage security laws.
As I mentioned earlier, there may be some time inconvenience in getting capital and the required return back, but within a matter of months capital will be returned to the borrower.
As a mortgage broker, I work closely with each of my private mortgage lenders to understand their lending criteria and risk tolerance so that any mortgage they enter into has a risk assessment that properly matches with their lending goals and risk preferences.
If you would like to learn more about how we conserve lender capital through mortgage risk assessment, then I suggest that you give me a call so we can have a discussion and get all your questions answered in the process.
Click Here To Speak With Toronto Mortgage Broker Joe Walsh
When it comes to private lending, there are a number of what I call myths as to what private lenders will and will not do with respect to mortgage lending.
These myths or misconception can get in the way of your ability to secure sub prime mortgage solutions from private investors.
By having a better understanding of fact versus fiction, you are placing yourself in a better position to succeed when seeking private mortgage financing.
So let’s get into the primary private lending myths and misconceptions.
Many times borrowers will not be prepared to disclose all their information and when a bank or institutional lender persists for full disclosure, the applicant will through up their hands and say they’ll just go private instead.
The view here is that privates will just lend money and they aren’t necessarily hung up on all the details and back story that led you to your financing requirement.
The reality is that private lenders are always going to concerned about conserving their capital, so while they may not require as much information as a bank or institutional lender, they are going to require enough information to properly assess their risk of investing in any particular deal. If the risk is assessed to be too high, they most certainly will not be providing a loan.
Bottom line, private lenders will not just do anything. Most won’t go high loan to value or enter into a deal where there isn’t a strong potential for exit and repayment. This fact alone can save you considerable time chasing money that may not be available to you.
There are many that hold the perception that all private mortgage financing is high rate, high fees which also relates to the term hard money.
The reality is quite the opposite.
Markets are always driven by supply and demand and the private mortgage market is no different.
Sure, rates are higher than bank rates, but rates and fees are relative to risk. If the risk is higher, the rates and fees stand to be higher as well.
If a private lender is pricing his or her money higher than the risk, then there are other lenders in the market that are more likely to be placing the deal.
Its not uncommon for people to speak of their fear that private lending is a greater risk to him in the event of default as compared to what they could expect from a bank. The thinking there is that in some way, a private lender will be more severe to deal with and can potentially provide a greater risk of property loss to the borrower.
This is again far from the truth as private lenders have the same legal rights as any other lender and follow very similar processes and procedures that you would see from just about any mortgage lender.
In fact, you may find that a private lender is more likely to work with you on a late payment or payment you would like to proactively delay making for some reason than what you might come across from an institutional lender.
Click Here To Speak Directly To Toronto Mortgage Broker Joe Walsh
Today we are going to talk about the conservation of capital in private mortgage lending.
In order to better understand this concept, let’s do a bit of a comparison to the stock market.
Because a lot of investor capital is in the stock market, this can be a good way to better understand how mortgages can promote capital conservation.
So lets get into an example.
In a mortgage you’re taking a snap shot in time of the mortgage investment and the property value. The mortgage is advanced as a percentage of the property value to protect the investor from risk of loss.
When you look at stock investment, the stock value will go up and down while with a mortgage, the value pretty much stays the same as well as the value of the property.
Most of the mortgages we place are for a one year term, so you’re not going to see a big change in the real estate value over a 12 month period.
During that year, the amount you invested stays the same, and the amount you earn is known from the outset.
With a stock, you certainly have the opportunity for large stock appreciation, but you also have the alternative to potentially contend with as well.
A mortgage provides a fixed rate of return, but a fair rate that is acceptable to the investor.
And unlike a stock, you know when you’re going to get your capital back. At the end of the mortgage term, you can get paid out or renew the mortgage. There is an exit strategy to get your capital back at a specific point in time.
So with a mortgage, the risk is very low and you know what your return is going to be.
With a stock, you are at the mercy of the market and must be prepared to ride the up and down swings that can occur in the market.
The investor risk of any private mortgage is managed through the valuation of the property relative to the mortgage amount being extended, and the strength of the borrower’s ability to repay.
If there are repayment challenges, we have the ability to work through them and recover capital and earnings through the rights that are afforded to all mortgage holders.
This is where the conservation of capital comes in both through the process for getting the mortgage in place, and the security its back by.
These and other reasons are causing more investor dollars to find their way into private mortgages both for residential and commercial properties, in first mortgage, second mortgage, and even third mortgage positions.
With private mortgages, the goal is to generate a fair return while minimizing the risk of capital loss which offers a significant advantage over the stock market if capital conservation is important to your investing strategy.
To find out more about private mortgage investing, give me a call and I’ll make sure you get all your questions answered right away.