If you're a mortgage broker in California, you'll undoubtedly come across a borrower that is unable to qualify for "conventional financing" because of credit score issues, a Notice of Default being filed, property type, or inability to prove income. What do you do? I have found a profitable niche in broking trust deeds to private mortgage investors. Now, let me caution you this, it is NOT an easy business. The borrowers, by their very nature, are difficult. The investor generally wants an investment that will yield 10-15% through a combination of points and rate. Your job, as a California trust deed broker, is to serve both masters while keeping the loan transaction within state and federal disclosure guidelines. Is it worth it? Absolutely. California trust deed brokers earn a margin of 2-6% on the loan transaction; you'll earn every penny of it.
Types of Investors and How to Find Them:
The first type of "hard money" lender is an institution. These small institutions are generally "California Mortgage Pools".
They raise money from individual investors who reside in California and
are restricted to lending on California properties. They are exempt
from securities registration if they are a Dept of Corporations CFL lender and follow the source and use of funds rules. Many mortgage pools make hard money loans as a HELOC to avoid the T-I-L disclosures and California High Cost Loan statute.
Most mortgage pool institutions that I know expect a yield that is
200-300 basis points higher than private individual investors.
The second type of lender in a private investor. I have had success finding these investors in the classified section of the newspaper, online via Craig's List or kaboo,
letters to private note holders (pulled by the title company from
public records), and networking. Ask your current investors for
referrals to other hard money investors; they tend to talk to each
other. If you provide good investor-related services (due diligence,
disclosure documents, loan document preparation, and servicing
assistance), you should have no problem getting investor referrals.
There are two strategies you should teach all of your trust deed investors: use qualified retirement plans (like an IRA) and leverage the notes
not held in qualified plans. One of the best investors I have was
"hooked" with the $500,000 in trust deed investments he held. He
constantly complained that he couldn't invest more money into trust
deeds. I found out that certain banks will lend up to 80% of the trust
deed's face value at a rate that is 5-6% below the note rate. We turned
his $500,000 into $1.8 million in trust deeds investments by using
leverage. We increased his net income from $60,000 to over $100,000 by
using leverage. The next thing we did for him was to tap into the
$1,500,000 in his qualified retirement plan. Rather than invest those
assets in securities (stocks and bonds), he enjoys a 12% return from
his trust deed investments in his IRA. It helped our business that we
were able to "find" an extra $2.8 million to invest in our hard money
deals.
Marketing Your Private Mortgage Lending Practice:
The best suggestion I have is to join the California Mortgage Association.
The Association has over 300 members of trust deed brokers and
investors. They sponsor quarterly seminars that address legal
compliance and marketing. It is a great opportunity to network with
other professionals in this niche market. There are 3800 members of
the California Association of Mortgage Brokers (CAMB) and 300 members of the California Mortgage Association (CMA). I kind of like those numbers when it comes to analyzing my competition !
The first thing I do is to market to local mortgage brokers.
Most brokers have little or no understanding about how to put a hard
money deal together; they turn to the mortgage pools. When they see
our lower rates and lower fees, they jump at the opportunity to work
with us! Our brokers typically make 2% on the
mortgage loans they refer to us. They submit a 1003, run credit, and
review an estimated HUD. Some like to be very involved in the customer
interface, most just let us take this function over. In 2006 alone, We have paid out close to $200,000 in co-brokerage fees to local mortgage brokers for their assistance in originating these loans.
I also market to Realtors and small commercial real estate agents.
This is an often overlooked referral channel. Realtors typically rely
on their "local mortgage banker" to help clients. The Realtors who have referred business to us have seen an extra closing or two a year.
In this market, that's the difference between success and just "paying
the bills" . Our ability to create bridge loans for their clients has
been a solution they've needed in a slow market.
Getting a list of "Notice of Default" filings can be profitable.
The title companies can pull this for you but the data is often 7-15
days old. Find a good local service provider that e-mails you the NOD
data the day it becomes available (2 days after the filing in San Diego
County). I have knocked on the door, sent letters, and called these
potential borrowers. You have to sift through the data to find
potential clients (they have to have equity) so the 50 or so NOD
filings a day really only yield 5-10 prospects. My most effective
method has been door-knocking but I've become too busy to do that now.
I opt for mail.
Blogging on Active Rain has been a HUGE help.
I've had 3 loans referred from mortgage brokers here on Active Rain and
one consumer call off of my construction lending blog. I can't express
how huge I expect this to be in 2007..
Finally, the other way to market your practice is to advertise.
I have found that this is a low-yield investment. I would advise you
that our business is so highly specialized and targeted that the
aforementioned marketing methods are much more effective.
The Future:
California
is going through a major readjustment in the market and the
affordability factor has much to do with it. Ignoring hard money loans
is a sure fire way to be left behind in 2007. Tomorrow, I'll discuss
the underwriting process and disclosure documentation required for
private loan transactions in California.
Brian Brady is a thirteen year veteran of mortgage origination and has 19 years experience in financial services. He has worked with Realtors and mortgage brokers since 1983. For more information on trust deeds, visit our website at www.SoCalDeeds.com
