CREATE THE NOTE YOURSELF OR PURCHASE THROUGH A MORTGAGE
If you wish to begin investing in private mortgages, you have two choices, either create the lending opportunity yourself or go through a hard money mortgage broker who specializes in private mortgage loans. Each approach has advantages and disadvantages, however, due diligence is required for success using either approach. If you decide to create the loan yourself, the first thing you must do is to locate a borrower. You’re looking for a professional real estate investor with a good track record and a fair amount of experience in successfully investing in the type of property he will be borrowing on. These borrowers can be found at real estate investment clubs, apartment associations, through ads you place in local or business newspapers or through referral. Local real estate associations often run meetings where property investors looking to borrow money meet with private lenders looking to invest in private mortgage notes. With a minimal amount of effort the investor with $5000 or more to invest should be able to obtain a fair number of loan requests to consider. When word gets around that you lend non qualifying private mortgage money, you’ll have plenty of calls and loan requests to filter through. You will have to decide on lending parameters, extent of due diligence required for your comfort level, and on whether the chemistry is right to lend to this particular individual. All of these factors will be discussed later in this book. In addition, if you decide to originate the mortgages yourself, you’ll need to consider the legal aspects of drawing up the note and deed of trust. The note is the instrument by which a borrower acknowledges borrowing money and promises to pay back the money borrowed. It lays out the terms of repayment. The Deed of Trust is the document that secures the note with a parcel of real property. Although there are standardized forms available for both of these legal instruments, we recommend that a well-qualified and experienced real estate attorney draw up and review all documents. By adding minor points or changing wording, an experienced real estate attorney representing you can create a document in the lenders favor. Don’t risk your hard-earned money unless the note and deed of trust are biased in favor of the lender, and never, never allow the borrower’s attorney to create or change any document. The note and deed of trust become important in those rare cases when default occurs and a foreclosure becomes necessary. If you’re going the solo route, then you must prepare for this contingency, however unlikely. Although the borrower has lots of equity in the property, default can occur. We’ve found that if a payment is missed and is not made up immediately, we are best off initiating foreclosure procedures rather than trying to “work things out”. Time is of the essence, the longer you wait to foreclose the more money you lose as payments are missed and the property is allowed to deteriorate. Lend in non-judicial foreclosure states such as Texas so that foreclosing does not involve going to court. Check your state laws. In Texas we can foreclose in less than 45 days from the date of default! UTILIZING A HARD MONEY OR PRIVATE MONEY MORTGAGE BROKERUtilizing the services of a licensed private money mortgage broker usually costs very little or nothing in terms of interest rate yield and significantly reduces the time, effort and risk associated with private mortgage investments and increases the number of mortgage investments to choose from. These private money mortgage brokers, sometimes listed under trust deed investments, can be found in most major cities of all states where usury and foreclosure laws are not onerous to lenders. An internet search on one of the major search engines should yield a variety of brokers to choose from. The private mortgage broker will originate the mortgage loan, thereby eliminating many steps and hassles with creating the mortgage yourself. The broker already has a stable of professional real estate investor/borrowers, has established lending parameters and criteria, will handle the legal documentation and be able to advise you in any question that come up along the way.The above covers the limit of what most private mortgage brokers do and how they operate. The broker you want to work with, however, will be one who is significantly more involved with his client lenders. The private mortgage broker you select should be the rare one who considers the investor, not the borrower, as his client. This broker will perform due diligence on behalf of the investor, handle loan servicing and collections, as well as foreclosure proceedings should they become necessary. Better still is the rare broker who considers his client investors’ interests as a fiduciary responsibility. This broker will be willing to find a buyer for your mortgage investment if you want to get out, and will sometimes be able to make you whole on your investment should unforeseen problems occur. While dealing with this rare breed of mortgage broker will not eliminate your need to thoroughly investigate the loan, it will insure that the broker’s interests are aligned with your interests, decreasing time and effort and increasing return. Private mortgage brokers earn their profit by charging the borrower points and fees to originate the loan and to find an investor to fund the loan. Typical fees for arranging these loans are high; 4 - 8 points are common. Payment of these points by the borrower should not reduce yield to the lender, as the lender should receive the total interest paid on the note. If you choose to use the services of a mortgage broker to help place your investment money, the broker will be familiar with the usury laws that apply to mortgage instruments in your state. State usury laws are sometimes complex; different maximum interest rates may be allowed depending on type of property securing the loan, whether the property is homesteaded, owner occupied, or even whether the lender is a private individual or corporation. Further, in states such as Texas, usury calculations includes origination points if the points are paid to the lender but do not include origination points if points are paid to a licensed mortgage broker! A well qualified private money mortgage broker will also be familiar with the foreclosure proceedings in the states that he is active in as well as redemption laws and bankruptcy filings as they might apply to a foreclosure situation. Private money mortgage brokers provide a valuable service in finding, analyzing, structuring and servicing the mortgage loan, making the investors job much easier and much less time consuming, as well as adding an extra degree of safety.
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