Author Topic: Private Mortgages?  (Read 1436 times)

cowabungadude133

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Private Mortgages?
« on: June 18, 2022, 10:48:02 AM »
I made a new handle to ask this. Has anybody here considered private mortgages (I.E. playing banker) to earn money when stocks are doing bad? If the amount of equity was high enough I think it could be a pretty safe place to put money at times like this.

Wintergreen78

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Re: Private Mortgages?
« Reply #1 on: June 18, 2022, 11:18:33 AM »
So you would find a person who wants to buy a property, then offer them a loan secured by the property. Would you charge more or less than the going rate for mortgages? How would you assess their risk of defaulting on the loan? How would you structure the contract?

This sounds like the kind of thing that could work out if you are loaning money to exactly the right person in exactly the right circumstance. It also sounds like the kind of thing that could get really expensive really quickly if anything goes wrong. If they default and you have to get a lawyer involved it wonít take very many hours to eat up your profit.

cowabungadude133

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Re: Private Mortgages?
« Reply #2 on: June 18, 2022, 11:36:17 AM »
It would basically be a longer term option to hard money lending. Instead of paying crazy fees and rates designed to screw somebody over it could be an option for non-traditional borrowers and would have much more strict equity requirements.

Example:
700k home, 500k private mortgage. Borrower has 200k in equity tied up so thereís a LOT of skin in the game so to speak.

500k lent interest only at 4.8% for 10 years. In this situation, the person lending gets 2k/month on money that would otherwise be sitting or depreciating in a recession.

Wintergreen78

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Re: Private Mortgages?
« Reply #3 on: June 18, 2022, 11:59:54 AM »
Iím curious what the laws are in the state you would do this and the process for repossessing if you have to. How long would they have to be delinquent, and how you would go about enforcing it. Iím assuming you would have to spell that out in the contract and take them to court to enforce it.

How much of your total wealth would this single loan represent? I could see risking 5%, maybe 10% on a loan to a single person. More than that would make me nervous. So if youíve got $5 million invested, a $500k loan is probably reasonable. If this is half your net worth, that is different.

Iím also curious about your thoughts about locking this up for ten years. If you have an emergency, do you have other assets that are liquid?

yachi

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Re: Private Mortgages?
« Reply #4 on: June 27, 2022, 04:22:59 PM »
The issue I see is that conventional lending is so cheap, and available that most borrowers would prefer it.  For example, conventional loans can cover a rental property with 30% down (about the numbers you're talking about), and 30-year financing.  I think you're setting the bar too low if you want to beat conventional financing interest rates; but if you don't beat the rates, you might be limiting yourself to clients who can't obtain conventional financing for some reason or another.  This has the potential to raise your risk, unless you have some special information on the borrowers that conventional banks can't, or won't include for example:
 If you lend to immigrants with excellent credit in their home countries
 If you lend to Mustachians with low demonstrated income but high retirement account balances

Where hard money lending comes in very handy is with rehabbing properties, or buying auction properties because conventional financing isn't available.  In my real estate market, you can buy a property at auction for 75% of what it would list for on the MLS.  The problem is you don't have time to get conventional financing on it, and have to settle in 30 days.  Contractors also find it difficult to obtain conventional mortgages on properties without functioning kitchens, or in unlivable conditions.  There can be a lot of excess equity available once the property is rehabbed.  In both these scenarios, the actual interest rate is less relevant than the total borrowing cost since the equity is available to pay off the loan once the property can be sold

An investment in mortgages might seem more solid than other things, but what happens is if you want out of the investment, you have to price it according to the market.  By that I mean that if you write a mortgage for $500,000 at 4.8%, and interest rates rise abruptly, you'd receive less than $500,000 for the mortgage, as another investor would adjust the principal in order to obtain a higher effective interest rate.

nereo

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Re: Private Mortgages?
« Reply #5 on: June 27, 2022, 04:45:02 PM »

FLBiker

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Re: Private Mortgages?
« Reply #6 on: June 28, 2022, 06:56:23 AM »
I'm no expert on this, but my FIL did it with a duplex he sold several years ago.  Honestly, I'm not sure exactly why, but he's one of those people who always thinks he's figured out an angle, even though (to my mind, anyways) he often does things in convoluted ways that don't actually bring a benefit.

That said, he's been happy with the arrangement.  I think they did a 10 year mortgage.  I *think* his main motivation was to keep getting an income even after selling the property.  Perhaps there was also a tax advantage to doing it this way, but I'm not sure.  Again, he's always trying to figure out angles, and I remember there being some issue with him having claimed lots of depreciation on the property, so I think there may have been a big tax hit.

Metalcat

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Re: Private Mortgages?
« Reply #7 on: June 28, 2022, 06:59:33 AM »
Well, I know a couple who just mortgaged their home with a private lender at a rate of 12% with an annual renewal fee. So it's pretty obvious why the lender is willing to take the risk.

A lot of people resorting to private lenders don't have other options, so the terms can be extremely favourable to the lender.

But, you are left with a much higher risk of having to enforce those terms, which can mean legal costs, so factor that in as well.

Also, why the new handle to ask this question?
It's a totally legit question to ask.

Morning Glory

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Re: Private Mortgages?
« Reply #8 on: June 28, 2022, 07:59:13 AM »
Contract for deed (buyer pays the seller in installments, instead of going through a bank) used to be pretty common, at least for lower-end properties. It's been about 20 years since anyone I know has done it, though. I've also heard of people borrowing privately from family for a home purchase. I've never heard of independent financing from someone who is not the seller or a close family member of the buyer. I wouldn't think the interest would be high enough to be worth it.

Askel

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Re: Private Mortgages?
« Reply #9 on: June 28, 2022, 08:15:14 AM »
Property contracts are still pretty common here. But that's because we have lots of property and people that don't qualify for traditional mortgages.

It's a business that can get real ugly real fast.  No way I'd ever get into it. 

I'm reminded of the lyrics from James McMurty's "Choctaw Bingo"

Uncle Slayton's got his Texan pride
Back in the thickets with his Asian bride
He's cut that corner pasture into acre lots
He sells 'em owner-financed strictly to them
That's got no kind of credit cause he knows they're slackers
And they'll miss that payment, then he takes it back
He plays that Choctaw bingo every Friday night
He drinks his Johnnie Walker at that Club 69

Paul der Krake

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Re: Private Mortgages?
« Reply #10 on: June 28, 2022, 08:56:52 AM »
I would certainly consider doing an installment sale on something I already own in order to spread out taxes and collect interest over a long period of time.

Buying something from someone else just to resell it as an installment sale is way too hard.

First off: the transaction costs.
Second: the risk of one part of the transaction working but not the other.
Third: probably not something I would ever want to own in the first place.

sammybiker

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Re: Private Mortgages?
« Reply #11 on: July 01, 2022, 07:19:22 AM »
@cowabungadude133 Yes, I've done this.  Pretty straight forward.  Just be sure there is equity to support the deal if things go poorly and that you have a plan in place to assume the property, repair it and resale to recoup your losses.  Make sure you're on the insurance and you have first position. 

 

Wow, a phone plan for fifteen bucks!