To understand who private mortgage investors are, it is first necessary to understand what a private mortgage is. A private mortgage is a legal agreement, secured by real property, between a borrower and a private lender that obligates the borrower to pay money to the holder of the mortgage note. A private mortgage therefore produces a regular stream of income to the private mortgage investor with all the advantages and protections that a mortgage lien can provide.
Typically, private mortgage investors can charge more interest and points (fees) on a private mortgage than a bank could because the risk of lending to people who aren't eligible for normal mortgages is far greater. Quite often private mortgage investors lend to people with less than perfect credit, but they may also lend to real estate investors irrespective of credit.
Traditionally, private mortgage investors were individuals who had sold their property and agreed to take back a promissory note and a mortgage from the buyer. The advantages to the seller were threefold. Firstly, by offering such terms, the homeowner was more likely to sell their property in a slow market and obtain the full asking price. Secondly, the seller would be a guaranteed a regular fixed income at a better rate than could be obtained from investing in a CD. Thirdly, if the buyer defaulted, then the owner would be entitled to foreclose on the property, just as if he or she were a bank. The benefit to the buyer of private mortgage finance is that they don't have to worry about an extensive check on their credit or financial situation.
More recently, private mortgage investors have branched out into other areas of real estate financing. Some private mortgage investors specialize in lending money to professional real estate investors for the purchase and rehab of residential and commercial property. Others specialize in the making private mortgage loans to small real estate developers for the purchase of raw land and the initial construction finance. There are even some private mortgage investors who will lend to homeowners facing foreclosure or provide second mortgage financing, similar to a Home Equity Line of Credit.
Such has been the growth in private mortgage lending that there are now companies offering private mortgage investment services in the USA. Typically, these companies will either advertise individual mortgages for "purchase" by an investor, or syndicate a hard money loan amongst a group of private mortgage investors on their mailing list, or offer shares in a private mortgage investment fund.
Lastly, but by no means least, there are private mortgage investors who specialize in buying private mortgages at a discount, i.e. less than the principal amount outstanding. These investors provide an important role in creating liquidity in what would otherwise be an illiquid market. The main disadvantage of being a private mortgage holder is that you must wait for the loan to be repaid before you can access your capital. If an investor can't wait that long, then they will need to find a way of selling the mortgage to a third party and this is where this last type of private mortgage investor come into their own.
Peter Haynes is a General Partner of Premiafund LLC, a private mortgage investment fund and a part-time real estate investor living in Florida. Find out more about private mortgage investors at premiafundDOTcom
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