|Apparently I wasn't clear. You describe loan-sharking. I knew Italians in Denver who did that, with enforcers. A very high risk business. They would have laughed at my tiny interest rates. |
No, I am simply doing exactly what any lending institution does when someone wants to borrow money and give a first deed of trust. I am the primary lender, there is no other lender involved. If they later want to further encumber the property with a second mortgage (deed of trust), that's somebody else's problem. I have first claim.
The 12% mortgage: guy had land given to him, he had enough cash to buy a used trailer, needed more cash for the well, septic, completion of trailer installation to get a certificate of occupancy. He knew that I understood finance and asked for my help. For such a small loan, I insisted on 12% to make it worth my time. I also suggested that he go to family instead as the cost of setting up the mortgage (attorney fee, filing, and a small surveyor cost) would be excessive for such a small loan.
He said I was his only hope, and included enough in the loan to pay the up front costs. The guy had substance abuse problems, a long record, generally a sleazeball. I wasn't too surprised he couldn't go to family or friends for a personal loan.
We set it up exactly like a standard mortgage, except for the late payment fee. Mine encourages fewer days late than the standard % of payment does. If he fails to make payments I can foreclose, just like any other lender.
My protection is the small LTV. No sub-prime lending here, I only loan up to 50% of what I could reasonably expect to get out of a foreclosure sale on the courthouse steps. Obviously I would have to go to the sale, to protect my interests, but I'd have the opportunity of buying the property extremely cheap. Just like every other bidder at the sale.
You guys are trying to make this far more complicated than it is. The above mortgage actually returned considerably more than 12% due to his asking for payment relief when he faced a 3 month jail sentence on the second year of the mortgage. Yes, I could have foreclosed and possibly bought the property very cheap. Not my inclination. I also know how to take property away from borrowers, amazingly legal in Virginia. Something I learned from another private lender who routinely did that. That's not how I choose to live.
The interest that would have been paid with those 3 missing payments gets added to the principal, which of course returns 12%. When payments resumed, I had no provision to increase the payment though I explained that it was in his best interest to do so. Nope, he wanted the low payment, which increased the length of the loan. At 12%, fine with me.
Now, if I had not had the cash, would it have made sense for me to take out a home equity loan to get 12%? Sure, when my home equity loan only cost half that much.
Another example: I speculated on a small piece of land, sold it to a guy who wanted to build a house. He had enough cash to buy the land. My profit was used as a construction loan, set up as a mortgage with a first deed of trust. Paying 10%, he refinanced as soon as he could. There was no prepayment penalty included in the mortgage. By borrowing construction money from me, he was able to build the house without a general contractor involved, saving him enough to warrant paying my higher-than-normal interest rate. We both won. I made a substantial profit selling the land, then 10% interest on the profit for the next 2 years.
I've held a lot of private mortgages. It's a very simple process with a good return, especially when you're faced with the problems this thread is about.
The options are only limited by your conscience, and state law. I could make a lot more money by being more aggressive, choose not to.
Everything clear now?