Private lending has been around for property developers ever since those ancient Pharaohs built their pyramids. Our capital markets today allow for much more public participation and transparency. Bank depositors provide capital for secured mortgages. Real estate investment trust (REIT) investors provide capital for property developers, augmenting the capital available from syndicated bank loans. The private capital market for small-scale real estate investors is now fragmented with boutique solutions. Many such creative real estate investing solutions are complex and not intended for amateurs. They are even fertile grounds for scams.
The assignment of a contract for the purchase of real estate sounds to me like brokering a transaction without being a properly licensed Realtor. I would not want to be in the shoes of an assignor or assignee if a property they're flipping was on some Realtor's multiple listing service and the Realtor files a complaint with their state's regulatory body. Private parties who are not licensed and do not adhere to government regulations or the National Association of Realtors' code of ethics open themselves up to serious risks if they can't complete an assignment deal.
Hard money loans are more expensive for borrowers than bank mortgages. These loans do not conform to standard credit guidelines and default at higher rates. Inexperienced hard money lenders can easily become suckers for a fast-talking sales pitch. Even experienced lenders can be stuck with a non-performing loan book in a significant market downturn, and they may not always have recourse to a bank that can help them offload troubled properties.
Seller financing strikes me as being just plain dumb. A borrower who cannot get a mortgage from a conventional source probably should not qualify for any loan at all, even from a private source. A seller willing to trust such a person's creditworthiness is trading the speed of an easy title transfer for the huge risk of non-payment. The advantages of this deal type all skew towards an unethical buyer: easy money, fast ownership, and rent-free living space if they never intended to pay up. Perhaps a desperate seller would do such a deal just to get rid of a very bad property, which would be just as unethical if the property had serious deficiencies.
The so-called "subject to" real estate deal sounds unbelievably complex for anyone who is not an experienced real estate attorney. The paperwork needed to get iron-clad agreements looks daunting. I looked for authoritative sources in my "subject to" Web search and found mostly amateurish promotions for this deal category that did not adequately describe risks.
Mortgage assumption is possible in some situations where the FHA or VA is involved. The good news is that banks and government regulators have rules for this quasi-official process. Buyers meeting conventional mortgage standards can use assumable mortgages if they meet lending standards and have enough cash to make any needed down payments.
These types of deals can lead investors to participation in real estate notes and trust deeds. Mortgage notes are a form of securitization paralleling the real estate sector's whole-hog embrace of mortgage-backed securities. Real estate trust deeds serve as security for loans that avoid third party participation. Notes and trust deeds are small-scale versions of the financing that mortgage REITs and trust deed investment companies (TDICs) provide. I will never understand why amateur investors would spend their precious time pursuing small lot notes and single trust deeds when professionally managed REITs and TDICs are diversified, well-capitalized alternatives.
These types of deals can lead investors to participation in real estate notes and trust deeds. Mortgage notes are a form of securitization paralleling the real estate sector's whole-hog embrace of mortgage-backed securities. Real estate trust deeds serve as security for loans that avoid third party participation. Notes and trust deeds are small-scale versions of the financing that mortgage REITs and trust deed investment companies (TDICs) provide. I will never understand why amateur investors would spend their precious time pursuing small lot notes and single trust deeds when professionally managed REITs and TDICs are diversified, well-capitalized alternatives.
Modern finance has tamed what used to be the wild world of real estate finance. Investing in real estate today is as easy as selecting REITs in a brokerage account. REITs come in multiple flavors: commercial, residential, mortgage-only, ETFs, you name it. The publicly traded ones all have prospectuses and histories of SEC filings for transparency. Privately originated notes, trust deeds, and other financing methods are less liquid and transparent than publicly traded securities. Some amateur investors will insist on biting off more risk than they can chew, just to fulfill their fantasies of becoming real estate moguls from their living rooms.
