Private Lending

What is private money lending?

Private money lending involves private individuals, or entities, lending their investment capital to borrowers, while securing their loan with a deed of trust, recorded against the borrowers’ real property.  Private money lending is a niche market for borrowers and/or properties that do not meet conventional institutional lending requirements.

Private money lending is based on direct lending against individual deeds of trust, driven by the value of the underlying collateral.  If carefully underwritten with conservative loan-to-value ratios, private lending offers a built-in safety net of protective equity, should the borrower ever default.  Generally speaking, private money loans are short-term in nature, and provide highly favorable returns to investors who participate.

Historically, private money lending has been a fragmented, “mom and pop” industry, and is known in some circles as “hard money” lending.  The industry has expanded in recent years, as traditional lenders have tightened their lending requirements and forced credit-worthy borrowers to look elsewhere for their financing needs.   USI believes there exists enormous opportunity to mature the industry and bring to it an institutional level of sophistication while providing investors outsized risk-adjusted returns.

Isn’t what USI does kind of similar to what traditional banks do?

Yes, very much so, but with one key difference.  Banks typically take your money, pay you say 1% a year in interest if you’re lucky, and then loan that money out to borrowers, at much higher rates, and pocket the interest rate differential.  At United Security Investors, we take out the middleman and allow you, as the investor to make the spread.

We make disciplined, well-underwritten loans, much like the traditional banks used to do.  But instead of paying you back only 1%, we pass along 100% of the borrower’s actual interest payment, less a small management and/or servicing fee.

Why would a borrower need a private money loan?

Frequently the answer is timing.  Let’s assume a borrower has applied for a conventional commercial bank mortgage, the closing date is fast approaching, the bank is still completing its due diligence, yet the borrower must close in a timely fashion in order to avoid losing a his/her contract deposit.  The borrower might choose to finance with a private money lender for its speed to close, and then after this “bridge loan” closes, the borrower can take as long as necessary to arrange permanent commercial financing.

Property type:  Certain property classes, such as mixed use properties, have trouble qualifying for some conventional institutional loans.

There are many occasions where a borrower will not fit into institutional lending guidelines, such as poor credit, citizenship issues, employment status (e.g. self-employed)

Finally, macroeconomic conditions can play a part.  The availability of conventional financing has tightened recently, due to the retraction of available banking credit as a result of the recent events of the Global Financial Crisis.   As a result, loans that would have been approved pre- crisis are now having trouble getting approved due to tighter lending standards.

What are the potential risks in private lending?

Risk varies among different types of property classes, lien positions, and loan-to-value ratios (LTVs).  No investment is entirely risk free and in the case of private lending with deeds of trust, real estate values may fluctuate and borrowers on occasion may default for a number of reasons, which could potentially impair the timing of an investor’s cash flows or even compromise them altogether.   But diligent and thorough underwriters, like USI, can effectively manage those risks with our strong local knowledge of the market, rigorous underwriting policies and sound business judgment.

How does USI manage risk?

Risk can be mitigated. A trust deed investment is only as secure as the underlying property securing the loan, and the security of the loan is a function of the strength of the underwriting process. As the first line of defense, USI represents the investor, underwriting each loan, working to identify all foreseeable and potential risks of the investment, mitigating and managing that risk.  Our strict underwriting standards and understanding of the local market are your insurance against potential risk.

Additionally, our investors are provided with access to all underwriting materials, which we strongly encourage all investors to review, to conduct their own due diligence.

The following factors are the fundamental drivers in our due-diligence process.

  • 65% maximum loan-to value ratio, depending on the property, which is more conservative than the industry averages.
  • Licensed and insured appraisers; and/or third-party, independent brokers who are experts in their geographic area and property type, providing broker price opinions (BPOs).
  • A stringent due-diligence review process, including an investment committee that reviews all loans.

Since our inception, our investors have not incurred any losses on any investment that we have underwritten.*  Additionally, every loan that USI makes has our principals’ capital co-invested, so USI’s interests are always aligned with our investors’.

Are there any outside resources that you can recommend?

Yes!  The California Bureau of Real Estate publishes a very informative paper on Trust Deeds, that we recommend all potential investors review:

Click here to read the CalBRE publication Trust Deed Investments – What You Should Know.

Additionally, we encourage you to visit our Latest News section, where we have highlighted some recent articles of interest from the financial press.