With so much protective equity, are private (hard) money loans made in hope of someday owning the collateral?

Investment security or eager for borrower failure, what is the motivation of private money lenders and their investors? We at Showcase Investments are private money lenders who serve our brokers and borrowers by making loans quickly and by relying on the protective equity in the property. This level of protection can range from 35% for 1sttrust deeds (65% LTV) to 45% (55% LTV) for higher-risk second position loans.

What is the investment motivation for our investors? It is stability. These investors are bombarded with its counterpart throughout the day, in print, on cable, and over the airwaves. In today’s climate of day trading, stock market volatility and low government bond yields, trust deed investments offer a predictable and high-yielding alternative for every individual’s portfolio, with special benefit to those investors more interested in predictable return than principal growth.

Do these investors want to foreclose and own the property? There are some investors who fund private money loans with hope of owning the investment. They consider the protective equity as their payoff. However, most investors fund private money loans for primarily for reasons which are far less covetous. Additionally, very few well-protected loans revert to the beneficiary. Rather, they are purchased at the foreclosure sale by third parties.

Consider that foreclosures costs money, and most investors do not want to inject more capital into the same deal, even though they will be paid a higher default interest rate on the funds. Your typical investor does not necessarily want to own properties which may require repairs, maintenance, leasing and disposition. These investors choose trust deeds as a vehicle for monthly income, not expense. Foreclosure is their option when the borrower falls more than 60-90 days late and fails to communicate their plans.

Does the private money origination broker want to foreclose? To answer this, you need to consider that originators earn a living primarily through two sources: The upfront fee (points) and servicing revenue. Income may be derived from the points, but businesses are grown based on servicing. For example, a fee of 2.5 points will help cover origination expenses, pay the referring broker their fee and contribute to profits, but a servicing fee of say 1% is what generates valuable annual cash flow to fund operations and hopefully make a profit at year-end.

Lenders do not typically want to disrupt long-term, predictable servicing income by filing a foreclosure action, but will do so when the borrower stops showing the good faith which lender’s desire from their borrowers.

Private money loans are shorter-term solutions for borrowers unable to wait or currently qualify for conventional financing. Similarly, they are investment opportunities for investors looking for higher-yielding, less-volatile investment returns. All parties to these transactions benefit from avoiding foreclosure and in doing what can be done practically to ensure that the borrower remains the owner of the property.