Types of Real Estate Loans

Private Mortgage Loans AKA "Hard Money" or Equity Loans

 These have also been called Hard Money Loan, or private mortgages. 

 First the good news, at least for the investor. These loans yield between 10% and 15% on a regular basis.  If properly done there is minimal risk of loss.  Investors are protected by the equity in the property, which in most cases is California Real Estate. Before the recent crash in values these loan were relatively low risk for the investor. Now, with values near rock bottom and the relationship between rental income and mortgage costs better aligned, the risk is actually much lower.

Investors are looking for very large equity positions to protect them, but they will lend on properties and to borrowers that banks won't.

 The Note’s can be sold to generate cash, and can generate a solid, predictable income stream for years to come.  The return is substantial, without a great risk of loss, and is often more than other investments such as the stock market or mutual funds.  The risks that do exist can often be mitigated by Insurance, wise investment and management of the assets

 The keys for the investor include making sure that there is enough equity in the property to secure your interest and making sure that the borrower is making their payments, especially on senior liens.  As an investor, you also want to keep yourself in a position to weather a worst case scenario. With trust deeds, usually it’s not a case of if you get your money, but when. Also, it's usually advisable to obtain title insurance when making any kind of mortgage. This insures you against any claims of record that others may have against the property.  In case you're wondering, when we provide an investor with a potential investment, we do take these precautionary steps, and go over the benefits and risks of each investment with the investor.  If we think there is above average risk, I either fund it myself, or pass on it altogether.

 So back to securing equity.  In most cases when we record a Deed of Trust to secure your Note against a particular property, we obtain title insurance to protect against unsecured liens.  Most equity lenders require 30% to 50% equity position to make a loan, depending on the type of property. If they don’t make the payments, we foreclose.  Most of the time this is not necessary, because they have something of significant value to lose, and enough equity to refinance or sell if the going gets tough.

 Managing your portfolio.  Usually the borrowers getting these loans get them because they have difficulty getting loans from the traditional sources.  Either the credit is poor, or there are other issues that make them a less than ideal candidate for your average bank, so they are willing to pay for relatively expensive financing secured by real property.  I say relatively, because the “default” rate on most credit cards can be double or triple the rates typically charged.  If they are late with payments,  because of the protection of equity, the money can be recovered. As long as the investor is prepared for the possible interruption of the cash flow by having other liquid funds, the delay is manageable.

 If you are interested in investing, I suggest you give me a call to get more information. Typically I try to put novice Trust Deed investors into low risk situations with lots of equity, and in First Position, where the risks are less.  Experience will help you decide which  Trust Deed and Notes to buy, and which to steer clear of.  Of course, my experience and expertise can be of great value as well. 

 Definitions:

Private loans are loans that are made by private parties/ investors.  Since the primary remedy available to such investors is foreclosure, they tend to be conservative with loan-to-value ratios, but liberal everywhere else. They look, in general, to the property for security. They are not written to conforming guidelines. These loans can be sold, usually to to other investors, and usually at a *discount.  A broker can also arrange the sale of these notes.   It is common for these loans to stay with the original investor for their entire term.  The investor decides which risks they are willing to take, and makes their lending decisions based upon their own guidelines rather than those of the larger market.  

 Recording essentially means recording an image at the County Reorders office.  When Trust Deeds are recorded they become part of the public record. When a title company or investor investigates the Record of a particular property or person, they are looking at these documents.  The Record follows the property until it is satisfied and a formal release is filed. In the case of a Trust dead, this release is called a reconveyance.

 Order of recording. In California notes are “ranked” according to the date and time recorded. They are public record, so anyone who is interested can inquire with the county recorder, and see who hold a secured interest against a given property.  A Lien is simply something attached to a property that requires the payment of money. Mortgages, Judgments, and taxes are all liens. There is also something called a mechanic’s lien.  These protect contractors who work on your property and helps insure that they will be paid.  They also sometimes take priority over mortgage liens. This is why when a property is under construction lenders tend to shy away from lending on that property.

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