Hard money brokerages make and arrange loan transactions using private party investors/beneficiaries. The private parties are the source of the private money capital. The investors essentially become the bank and invest their capital as the lenders. They receive collateral in form of a promissory note and a recorded deed of trust, both signed by the borrower. If multiple investors participate in a loan transaction, all the investors would become tenants-in-common. Each investor owns a portion or percentage of the entire loan. Investors develop a relationship with the company that provides trust deed investment opportunities, and regularly communicate about new investment opportunities.
There is another subset of the mortgage/loan solicitors that markets to the public for the purpose of a new loan request, but do not have direct access to a private party investor base. This subset essentially become subagents to the private money capital broker. When a prospective borrower calls and discusses a potential loan transaction, they are usually not aware that the broker is not the direct source of the capital, but indeed must work through another company.
This is a customary approach for the private money business and may work very well. A new problem arises when Broker A, contacts Broker B, who contacts Broker C, who then contacts the Broker D who has the private capital investors. This is referred to as “Daisy Chain” brokerage services.
Here is a classic example: A developer has almost completed his ministorage construction project but finds himself about $500,000 short to complete the project. The developer has a $4,000,000 first lien construction loan that is near fully funded. Upon completion, the developer will then rent units to the public until the time of stabilization, approximately 95% occupied. Then the developer will refinance with a long-term permanent loan.
Broker A is referred to the developer and obtains pertinent information about the loan request. Broker A then contacts broker B, Broker B contacts Broker C. Broker C has a relationship to the private capital source Broker D. Broker D quotes a new loan transaction of a second lien position 12% interest only, 2 points originations for a 24-month loan. This appears to be a reasonable risk/reward quote to make a $500,000 loan subordinated to a $4,000,000 first lien. Then, comes the rallying cry from each “Daisy Chain” broker for a piece of the action, and each demand 2 points for their fee. The end resulted in presenting an offer to the borrower to pay a total of 8 points, plus appraisal and closing cost. You can guess the outcome, a resounding “No Thank You.”
There is a dramatic discrepancy in pricing when “Daisy Chain” mortgage brokers expect a significant piece of the action. In many cases, each broker may have spent ½ to 1 hour of time, only to expect big payoff. Is this the way to a successful outcome?
There is a big difference in a mortgage broker operation who is receiving a relatively small finder’s fee as compensation for passing along a lead to another broker, and a mortgage broker who has the relationship with the private party investors. This broker has the task of procuring loan transactions, including processing, underwriting, funding, and manages private party investors, including the servicing process for the life of the outstanding loan until the payoff. One prominent mortgage broker who funds loans with private party beneficiaries, indicated that he solved this problem by capping all the “Daisy Chain” mortgage brokers in aggregate to not exceed his origination fee.
As with all loan transactions, interest rates, terms and fees are negotiable between the parties. Variations will exist depending upon perceived risk, property types, locations, amenities, borrower strength, and exit strategy. Also, competition for loans, and yields in the market is an important factor.
Business and Private Money Finance Consultant
Bus. 949 521 7115
Cell 949 533 8315
If you find that this article provides value to you and your associates, please forward it to others that may benefit from its contents as well. Please refer your friends and associates to go on-line to danharkey.com and subscribe to my future business, finance, and real estate related articles.