Private Mortgage Lending: Insider Reveals All
This insider video reveals the truth behind how private mortgage lenders make their money. If you are a finance broker, investor or borrower you will not want to miss this.
In this detailed video you will learn the following valuable information plus much more!
1. How private lenders generate their profits.
2. Why and how you would become a private lender, tips and traps.
3. Why you would borrow from a private lender.
4. Why we are at the beginning of a renaissance of private money loans.
Hit the play button below for a rare look inside private lending. Transcript also below.
We act for private mortgage lenders; I guess you could break that up into two groups or two major groups. Institutional private mortgage lenders, they are people who lend through an organization known as a responsible entity and that’s the institution and private mortgage lenders who lend direct. They lend their money directly to a borrower without there being a middle man. Private mortgage sector as I said before is divided into two components, one which is those private mortgage lenders who lend through a responsible entity and those who lend directly. Lenders who lend directly are totally unregulated, what that means is that they don’t need a license in order to lend, as long as they’re lending on commercial loans and there’s no legislation that they’re subject to other than general legislation. Lenders who lend through a responsible entity are subject to various regulations that are spewed out on a monthly basis by ASIC and one of the recent ones is some changes that have been made to external dispute resolution providers and ASIC has decreed that if a complaint is made against an AFSL holding lender then all enforcement on the mortgage on any mortgage involved must cease immediately until the complaint is dealt with. Now those complaints we’re seeing them stretching as long as 18 months so what that means is if your lending through a responsible entity you’re in a predicament, because although the loan has gone into default and although your no longer receiving interest payments and the market may be moving against you, you cant sell the property for up to 18 months where as a private investor who deals directly with the borrower is not subject to the same rule, they can instantly sell the property subject to any delaying tactics through the courts.
If I wanted to become a private investor on these types of mortgages what are the advantages for me as an investor?
Rate of return and security and also the ability to judge the investment for yourself. I’ve known a lot of investors many of those private mortgage investors have been doing it for literally generations so I know an old man who’s father and who’s father before him used to do private mortgage investing and the reason they come back to it over and over again is that the investment is something they control to a much greater extent than if you buy shares in a stock market, if you bought shares in Qantas you’d be sitting there wondering should Qantas go head to head with the unions or shouldn’t, which is the best outcome? But its actually irrelevant because there’s nothing you can do about it, you’re in the hands of the Qantas board of directors likewise if you put your money into a pension found where there going about buying bonds and shares even mortgages, they’re doing things which you may or may not agree with, you don’t have control and with control comes security.
Due Diligence – private investors like to do the due diligence themselves
That’s right, I guess Private Mortgage investing is very similar in terms of the security and control it gives to an investor as what buying your own property is like, so people run off and buy units and houses not because of the fabulous return, I think the return on a rental property these days is 3 or 4 % they do it because at least they can be sure that’s the property is worth what its worth they’re investment isn’t going to evaporate over night, well it’s the same with private mortgages with the difference in the return. The return on a private mortgage is somewhere between 9 and 12%. If you do the same due diligence on a mortgage as what you did when you purchased a property then you generally speaking wont lose money.
One thing we haven’t talked about and this goes back to due diligence is valuations and valuers. Do private lenders use valuers?
Well they do and they don’t generally speaking when a broker brings a deal to you they bring it with a valuation attached. They say here’s the property and by the way here is the valuation I had done. The first rule of private ending is you never rely on a valuation procured by someone else. The valuation may not be for mortgage purposes, it may not be a licensed valuer, it may not be an insured valuer. 99% of the time there will be a disclaimer clause saying that no one can rely upon it except the person its been addressed to. So as a general rule of thumb a valuation should only ever be used as a guide. It’s a starting point in your due diligence and a lot of investors, first time investors in mortgages are upset by that, they say well if I cant rely on the valuation what can I rely on. To that I would say, if you were buying a property would you bid at an auction for a property based on what someone said in a valuation and the answer is the valuation is just an opinion. And often times it’s the opinion who is paid a small amount of money, $200 to fly into a suburb and fly out on their way to the next job and not someone who has a vested interest not someone who is investing several hundred thousand dollars in the property so the chances are if you do due diligence you will get a better result than the valuer will and that said the valuer has access to various resources like RP Data so he will list comparable properties that have been sold in the area and make comments to whether he thinks their inferior or superior to those. So when you’re accessing the value of the property, the comparable sales are a great tool. You have them, you can then go and visit those local properties and see if they are in fact superior or inferior.
Is it a good time for Private Investors going into the market?
Yes it’s a very good time; the GFC has had the effect of causing credit to tighten for commercial borrowers throughout Australia and almost every type of real estate and every type of business. The other thing that has happened is a great number of lenders who were previously in the market using securitized funds as the securitized mortgage market has dried up. They’ve stopped lending all together and as I mentioned before the pulled mortgage funds which were much more substantial in the area they have all pretty much ceased and gone out of business, sort of situation where it’s a little bit like after a near extinction event where they are no competitors and who ever is left alive can survive and can flourish. Were seeing now that the deals available to private investors are much more favorable then we’ve seen in 10 or 15 years. The loan to value ratios are very low which means that the amount your investing compared to the security your getting is smaller than before giving you more security. So where as in the past private lenders in order to obtain loans would have to go up to around 70/75% on a first mortgage. Now they’ve got the pick of loans and can choose loans where the properties worth, where they’re looking at a 50% LVR so the properties worth twice as much as what they are investing. Now with that buffer as long as the properties worth what you are being told, with a good buffer it’s almost impossible to lose money.
Who makes a good private lender?
Well private lenders that I’ve seen are business owners essentially; I’ve never seen a good private mortgage lender who is an employee the mindset is very different. Business owners and investors are people who have say for example a commercial property port folio make excellent investors simply because they’re used to operating in an atmosphere where the bucks stops with them. Probably the number one thing you need to look out for is the value of the property, so I’ve hammered it over and over again, I’ll hammer it again. You don’t lend on a property unless you would be prepared to buy it for what the valuers valuing it at. Its as simple as that, I suppose if the loan to value ratio was particularly low, you could alter that rule accordingly but essentially you have to analyse the property. Now analyzing the value of the property has all sorts of nuances to it. When I first tot into this game, quite some time ago there was a property where they had loaned on it, and it had just been finished but it didn’t have an occupation certificate, but they figured well its actually finished there’s people living in it, why would you need an occupation certificate. As it turned out the development application required that the contamination of the soil that the house had been built on, cause it used to be a service station, had to be remediated. So when they went to sell it they couldn’t sell it without the occupation certificate and remediation involved pulling the house down and digging up all the dirt and so they got like 10c in the dollar back. So valuation has pit falls within that pit fall. That’s one example. Anything that’s not a completed property you have to be very careful of. Vacant land, I was always told by my mentor in this business, that you can’t give away vacant land in a recession; well everyone’s learning that over again right now. So that comes down to timing. You can certainly lend on vacant land. And vacant land in globo land, land banking they were some of the best and most lucrative deals that people could do between 1998 and 2004, anyone who stayed in after 2004 progressively between 2004 and 2008 started to lose their shirts. So that’s valuations and they’re just two examples of the aspects of valuations. The main pitfall you have to be concerned about is contracts or review act defenses. Now contract review act defense is where the borrower goes to the court and says your honor I don’t want to pay this money back, I don’t want this mortgage over my house anymore, I want you to remove it. And the reason is because the loan and the mortgage are unjust, now that sounds quite unfair and capricious after all somebody signs a document they should be bound to it. This concept of unjustness is actually given very narrow application by the courts and in a nutshell you only get burned where the money that you loaned on that property was syphoned off by a third party. Now there’s a couple ways that could happen. An 80-year-old Sicilian lady who doesn’t speak English, who’s on the pension may want to borrow against her house but she’s only the guarantor and the actual borrower is her nephew who needs the money to bring a band out from America, that’s an actual example I’ve given you. That loan was set aside as being un just. So Id steer away from elderly people, id steer away from elderly people particularly who have been if you like having their property borrowed on by someone else. So third party mortgages their called. But it’s not just situations where the owner of the property is giving a guarantee although that’s the main area of danger. It can also happen if the owner of the property is borrowing the money and then giving it to some sort of fraudster. Generally speaking, that sort of problem would be filtered out by my office. So when I see a loan I’d like to know where the moneys going, I like to know a little bit about the borrower, if the borrowers a little old lady or a widow or anything like that, then I’m going to do some serious digging, we’ll probably kill the deal for you. It won’t go ahead. If were on the other hand, its an ugly property developer or a business man and he’s using the money for his own purposes then that’s fine, it’s a subtle process making sure that the loans not going to be susceptible to these claims and that said not a lot of these claims get up, that’s very very rare, I think from all the cases that have been heard in the last 20 years only 15 mortgages have been set aside, 15 or 16 I think it is. That’s not really the danger, the danger is that the case is almost going to win, and because its almost going to win people take a punt and when they take a punt you wind up in court for 3 or 4 years and during those 3 or 4 years your getting no interest, your paying out vast amounts of legal fees and so even though you win you’ve gone through a very traumatic episode and its best not to do it so for that reason I assist my clients to filter out loans that are ever going to be questioned.
Where do I begin my journey to learn to be a Private Investor? What do I do from here?
Well the first thing you do I guess is find yourself a good lawyer who knows all about mortgage law.
How do I check that though? How do I know they know what they’re doing in that area?
Well when I tell people to do due diligence on Bransgroves lawyers, the first thing I always crow about it the fact I’ve written a book on the subject, but probably from my perspective the best credentials we have is you go to Auslink which is the repository of all the legal cases and you type in the name of your solicitor and if they’re experienced in mortgage law a whole heap of mortgage cases should come up, if they’ve never done a mortgage case then nothing is going to come up. If they’ve done a disastrous case and someone sued them then that’s going to come up. So that’s one way of testing but generally speaking private mortgage practitioners specialize they only practice in that one area. And so that’s a good indicator. If a lawyer has on his website that he does family law, criminal law and he does mortgage law, id run a mile. If he’s doing mortgage law plus commercial law, that’s that! Most private investors also who have been around for a while they know who these lawyers are by reputation. So when an investor comes to me wanting to get into the industry ill say well look here is a list of some brokers, I know who introduce private mortgages to people like yourself. They’ll go off and talk to them and often the brokers will tell them about other solicitors who practice in the area. There’s only about 4 or 5 solicitors who actually do this sort of thing and do it very well.
OK so ill start with; get myself a decent lawyer, then what would I do next?
The lawyer will point you towards a bunch of brokers, rather than going to one broker id go to all 5 or 6 of them. Say to them guys I’ve got this money its looking for a home, have you got any deals and then review the deals as they come in, choose the best cherry pick the best deal. Typically the broker will send you an email with a scenario, this borrower has a trucking business, he’s got 5 trucks 2 of them are off the road at the moment, therefore to get them back on the road he needs to inject capital into his business, he’s got 3 properties, he wants to pledge those three properties for the loan, we’ve asked him what they’re worth he’s given us two valuations and a real estate agents appraisal of the third property. The loan to value ratio is 58%, do you want this deal? So you’ll look at it and you’ll say there’s three properties I’ve got to go visit, that’s a bit of a hassle for me. So I don’t just want 8.5%, ill do this deal but I want to do it 9.5/10%. What about those trucks, id like him to pledge those trucks to me. I understand that he’s already got leases on them but those leases are only worth so much, anything unencumbered. So you negotiate through the broker and eventually the broker and you and the borrower come to an agreement on the rough parameters if you like of the loan. That’s documented in the form of a brokerage agreement, which is constantly amended till it perfectly reflects the agreement. The borrowers signs that brokerage agreement, the brokerage send its to you and then you would send it to your solicitor so I would receive an email that would say look I’m going to do this loan here’s the brokerage agreement it sets out the term of the loan, the amount of the loan, the interest rate, the nature of the securities and by the way here’s the application form that tells you what the loan scenario is so once I receive that I would then prepare security documents and perform all the necessary searches and legal due diligence that I need to do. If you as investor say to me look do you think I should do this loan. Ill often say no I never say yes. So if there’s a legal reason that I don’t want you to do the loan, for example contracts review act, if there turns out there are caveats on the property, undisclosed liabilities and so forth and then ill say no. But I’m never going to say this is a wonderful investment any more than if you came to a lawyer and asked him to tell you whether the property you’re buying that he was being asked to do the conveyance on is a good property he’s going to say how would I know. My job is to give you legal title to the property, which means come what may if you want to get your money back and the borrowers not paying it back you can sell that property. That’s my job, your job as the investor is to make sure that when you do sell that property it’s worth what you put into it.
Just going back to brokers and introducers, what are some of the ways you’ve seen to work out who’s a good broker and who’s a bad broker?
Right, It’s a little bit like crossing the road, at midnight, on Saturday night, on George Street. A lot of hoons going up and down there who will run you over because they’re pissed to the eyeballs. As a general rule when I cross the road I assume they’re all bad, I look left I look right and I look left, just as you would. It’s the same with brokers. That’s another question I often get asked who’s a good broker, ill often say who’s a criminal broker and not to deal with a particular broker. But very rarely will I give a broker a commendation. Over the last 15 years or so, that I’ve been in this game. They’ve been brokers who I thought were good brokers and who were good brokers for very many years and then when various financial cash flow issues hit their business, they suddenly turned into deceitful misleading brokers but there’s never a lie that a broker can tell that you cant find out with proper due diligence so its best to treat all brokers as bad brokers, treat everything you’re told as being a lie and do the necessary due diligence and that’s something the investor and I will talk about, what the appropriate steps are for a particular loan scenario.
What’s the best way to get in contact with Bransgroves?
Google. Google bransgroves. Up will come our website and click on contact us.