A Hard Money Guide for Loan Brokers

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 craigslist 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).

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.