Today we’re going to discuss some of the concerns I hear most often from investors that are considering investing in private mortgages.
These are individuals that typically are heavily invested in the stock market and are looking to diversify their portfolio via private mortgages, but are unsure of the related risks, which becomes a barrier for them moving forward with mortgage investment opportunities.
For the benefit of anyone that is considering private mortgage investing, I came up with the most common concerns I hear and will now go over them.
Investors can have a hard time rapping their head around how providing a private mortgage to someone with bruised or poor financial and credit profile could be a good investment opportunity.
Well the fact of the matter is that a private lender provides mortgage financing in the same manner that an institutional lender does and has the same legal recourse available to protect themselves against loss in the event of borrower default.
On top of that, you’re still actively doing risk management, assessing risk, and determining which scenarios fit your lending criteria because there are lots of scenarios where people can require a private mortgage without bringing high levels of lender risk to the table.
As banks get tighter and tighter with their lending criteria, there are more and more deals that fall to private lenders. And not only are more deals available, but many of these previously bank grade deals are very appealing with respect to risk assessment and risk management.
The second most common investor concern is how do I go about maintaining and administrating a private mortgage.
Individual investors don’t typically have a staff or admin pool to draw from unlike a bank or institutional lender, so key barrier to private investing is the concern over how to cover off mortgage administration requirements.
In reality, a private mortgage typically has very little administration that is not hard to cover off. The term is usually one year, and the borrower provides 12 postdated cheques for the monthly interest only payments. The time required to administer most private real estate loans is really quite minimal and should not be viewed as a borrowing deterrent.
There is always the possibility that a default can occur and there can be a big fear of capital loss which once again stops an investor from moving forward with a private mortgage opportunity.
This is where we come back to risk assessment and entering into a mortgage where capital conservation has been properly considered from the get go.
When a default occurs that the borrower does not immediately rectify, we turn the process over to a lawyer to manage the power of sale process if necessary to get all your capital and accrued interest paid back to you.
Regardless of the amount of time it takes to deal with a default, capital is conserved by the risk assessment and risk management process conducted before funds were ever advanced.
If you need more information on private mortgage investing, I suggest that you give me a call so we can discuss any concerns you may have and determine what lending parameters best fit the level of risk you are prepared to take.
Today I want to talk about why you need to use a good mortgage broker when investing in private mortgages.
In my opinion, having an experienced broker is crucial to getting the return on capital you’re looking for and here are the main reasons why.
First of all, you want a broker who originates a fair bit of business and can provide you with the deal flow necessary to place your money in deals that are going to fit your criteria.
Not all deals that come along are going to be of interest to you for whatever reason, so you want to have a source of deals to choose from so that 1) you only place funds in deals you’re comfortable with, and 2) you aren’t waiting long periods of time in a cash position waiting to find a mortgage to invest in.
The second reason for using a good private mortgage broker is take advantage of their ability to do proper deal and risk assessment.
For almost any private mortgage that ends up losing money or even losing part of the original capital, the loss event could likely had been avoided when the deal was first assessed and risk of loss was analyzed.
Proper representation will uncover all the relevant facts about a particular deal most of the time, which allows you as a private mortgage lender to make better assessments of the deal so that any related offer you make to the borrower is not going to put you in a loss position down the road.
Private lenders want to clearly understand the reason why a mortgage request is seeking private funds. This doesn’t mean they won’t lend money if a few blemishes exist. But it does mean that the advance rate, cost, and terms are going to fit the deal according to the risk of loss it presents.
A experienced mortgage broker will be focused on providing you all the relevant information for the deal so that you know exactly what you’re getting into. And through experience, he or she is also going to know what to look for versus some one with less experience with private lending and investing.
Once you have reviewed an application for funding and put out an offer to finance, then the next step is closing the deal.
This is another key area where a mortgage broker can add significant value to the process.
While some may think that once the deal gets to the point of closing, there isn’t much work left to do. But in many cases, the work is just getting started.
The mortgage broker is a facilitator of the closing process, making sure that all involved parties are completing their part to get the mortgage in place. This can mean working with appraisers, environmental consultants, accountants, property managers, and of course lawyers to make sure not only that all the lender requirements are being met, but also that any problems or issues are dealt with swiftly so that the deal doesn’t fall apart unnecessarily.
There is art and science to the closing process and having someone representing you that has done a lot of private mortgage closings is certainly a benefit to your private mortgage investing activities.