Prosper.Com - An Easy Way To Become A Hard Money Lender?

The Savvy Saver blog has a post about a new web service - Prosper.com. This site matches people who needs loans with people who want to lend money. If you need money, you post the amount you need and what you want it for. If you are lending money, you scan the listings of people needing money and, when you find one you like, you can offer to loan a certain dollar amount at whatever interest rate you want. The site will pool money from different people for those wanting to borrow large amounts. Loan lengths are three years and payment amounts are amortized over that period. Loans can be paid off early with no penalty. Payments are made electronically.

I've not spent much time looking into this, but it seems like you are basically making an unsecured loan to people. The site does claim to run credit checks on potential borrowers and assigns them a credit rating but, as Savvy Saver pointed out, their credit checks seem to miss a lot of outstanding debts.

Additionally, if you make a loan and it is not repaid, you may not even be able to track down who borrowed your money! From Prosper.com's FAQs:

Will the lenders know my identity?
There is never a need for lender and borrower to contact each other and it is entirely up to the lender and borrower to choose how much information they wish to share about themselves.

So how does Prosper.com make money? They charge both the borrower and the lender. The borrower pays a 1% closing fee (or $25, whichever is greater). If you choose not make payments electronically, the borrower is also charged an additional 0.25% interest. The lender, on the other hand, is charged a 0.5% annual servicing fee, accrued daily, based on outstanding loan principal.
Because the servicing fee is based on a daily outstanding principal balance, which is an amortized amount, the servicing fee will vary for each loan based on its interest rate and length. As an example, the site says on a $5,000 loan at 10% interest, the fee would be $40.40 over its full 3 year length.

Prosper.com was started by the founder of E-LOAN.

I'm somewhat interested in this. I'm not sure about making unsecured loans, but you can start lending with as little as $50, so the risk is low. (The maximum amount you can lend is $25,000.) I prefer hard money lending with property as collateral. The returns are generally higher and you get to keep any loan origination fees. (Prosper.com will collect late fees and pass them on to the lenders.) But this looks like a relatively easy way to get some extra cash.

To share some of my own personal paranoia with you, I will not give any company permission to electronically withdraw money from my bank accounts. (Now electronically depositing is another matter!) If you are interested in using Propser.com, I would suggest opening a separate checking account and deposit only an amount you are willing to lend.

House 3: Papers Signed

I made the trip to the title office this morning and signed all the paperwork and dropped off a cashier's check. Now the seller has to go in and sign and the deal will be done! I found out the seller is a hairdresser, so she's walking away from this deal with the equivalent of 2 years salary. Nice.

I also called the utility companies and had service transferred to my name, effective tomorrow.

I got a call from my insurance agent, who had some questions about the building. It was originally built in 1951 and he wanted to know if the plumbing, electrical, or roof had been updated since then. I don't know the answer, so I've passed those questions on to the seller.

The next steps for me are to meet with the seller (or Joe, who assigned his contract to me) and get the keys. Then, I need to go through the house and make a list of what needs to be repaired.

Money Magazine's Foreclosure Article

There is a fairly good article about foreclosure investing on Money Magazine's website. I tend to agree with most of what they say, although the article, like all mainstream articles I've seen about foreclosure investing, plays up the negative aspects of the industry. Unfortunately, there is also a huge mistake in the article, from a source that should know better.

Talking about buying at foreclosure auctions, the article says:

Auctions are by far the riskiest way to invest, says Rick Sharga, vice president of marketing at foreclosure listing site RealtyTrac.com. "You are buying the property sight unseen, and you will be responsible for any taxes, liens or second mortgages still on the property."

This is simply not true and Sharga should know better, given the company he works for. First, there is no need to buy a property sight unseen. Auctions are announced in advance and the properties up for sale are listed. It is true you may not be able to get into the property and do a complete inspection, but you do have the opportunity to at least look at the outside, possibly peer in the windows, and formulate an educated guess at to the condition - a far cry from "sight unseen."

Second, while you will be responsible for taxes (which are not an unknown amount - you can get any amount due from your tax collector's office), you are NOT responsible for any second mortgages or liens provided they were recorded after the mortgage that is foreclosing! A foreclosure wipes out all liens recorded after it (again, except for tax liens, which always must be paid). If fact, if you look at the liens against a property, you will never see anything titled "First Mortgage" or "Second Mortgage." There are just mortgages. The "first" or "second" designation refers to the date the mortgage was recorded. The one recorded earliest is the first, the next one is the second, etc.

If the first mortgage is foreclosing and you buy the property, you may have to pay some of the second mortgage if you agree to buy it for more than is owed to the foreclosing lender. For example, a property has $100,000 due on the first mortgage and $20,000 due on the second mortgage. You win the property at auction for $110,000. You pay $100,000 to the holder of the first mortgage and the remaining $10,000 to the holder of the second mortgage. That's it. You are not responsible for completely paying off the second mortgage because when the first mortgage foreclosed, all subsequent liens were wiped out. This is why second mortgages are riskier, from a lender's point of view, than a first mortgage - there is a possibility that they will not get paid off if the property goes to foreclosure. This also explains why sometimes the holder of the second mortgage will go to the auction to bid up the price of the property so that it is high enough to ensure he gets paid.

House 3: Purchase Moving Forward

I finally got in contact with the escrow officer this morning. He doesn't have a dollar amount for me yet because he is still trying to contact the seller to get her payoff amount. Once he has that, I can bring a check over and sign everything. I had to fax him my LLC's Articles Of Organization. This is a standard request, so I had copies ready and faxed them over a minute ago.

I emailed Joe to see if by any chance he got an SPDS from the seller yet. This will tell me which utility companies I need to call to transfer service (among other things).

I've decided to go with a different handyman this time, rather then the guy I've used on my last two projects. That guy was pretty good, especially with his price, but he works really slow and always takes longer to complete a job than he estimates. Instead, I contacted a company that I used for a job at my own residence a couple years ago. I wasn't sure how big of a job they could handle, so I called and gave them a rough idea of what I need done - interior and exterior paint, bathroom repair, some drywall work, etc. Turns out, they handle everything from a complete remodel to changing a light bulb. As an added bonus, their next opening is Monday, which is when I should have possession of the property. I didn't set a definite appointment yet, since I don't have keys to the property and I haven't even looked around to generate a list of everything that needs to be done, but I let them know a job will be heading their way soon. They will probably be a bit more expensive than my other guy, but, from what I've seen of their work, they are more professional and punctual.


On the administrative side of things, I made some purchases that I had been putting off for a while. I got the 2006 version of Quickbooks Pro, which I need to import the file that my CPA returned to me. I also ordered my business cards and bought a fax software package for my PC. This will accept faxes, convert them to PDF files, and email them to me. This way, I don't have to be at home to pick up a fax and, hopefully, I can cut down on the amount of paper generated (which is always a lot in this business).

House Purchased!

I'm back in action again! I was out grocery shopping with my wife on Sunday morning, when I got a phone call from Joe, the person who emailed me last week about a house he had under contract. That deal had fallen through when the seller cancelled the contract. The house was now available again.

I drove out to look at the property that afternoon and after that, met up with Joe. He suggested we meet at a Starbucks in Scottsdale and, when I got there, I realized this was the same Starbucks I had met a Realtor at a couple years ago when I sold my first house. Interesting coincidence!

The house looks in OK shape. It's in a Hispanic neighborhood that is pretty well-kept. Yards were nice, although there was a lot of dead grass in them. Some houses were very nicely maintained, others, just so-so. Several new cars were parked in driveways and on the street. The owner was still in the house, so I couldn't go in, but the outside looked OK. From what the Joe told me, it needs new paint and flooring, some work in the bathroom, and some minor drywall work. It has EVAP cooling and could use a new unit. The house was built in 1952. The roof looked decent. There was a one car carport that has been converted into an additional room, including plumbing for another bathroom. The house is a 3 bedroom, 1 bath with about 1,500 square feet. The converted carport adds another 400 square feet. The price is $138,000 and comps are in the $170,000 to $185,000 range.

When I met up with Joe and his wife (who is also a real estate agent), I got a bit more info about the property and the seller. The seller's husband has been arrested for a drug-related charge and she is a witness against him. She wants to sell the house and get away. She cancelled the first sale because her lawyer told her she couldn't leave the state. Apparently, now she can. She just wants $45,000 out of the sale and can leave as soon as she gets the money. Luckily, she has a disclaimer deed from the husband which clearly states the property is solely hers and he has no interest in it. (I've verified this.)

The house is a fixer-upper. If I wanted to go all out, Joe thinks I can put in the additional bathroom and sell for close to $200,000. I'm not sure if I want to do that simply because I'm a bit leery of holding on to this one for too long, given the rapidly declining market. Putting in a bathroom would require getting a contractor, which almost by definition, means the project will run over budget and longer than planned. Once I get inside and have a detailed look, I'll know more. (FYI, I have seen pictures of the inside and it doesn't look too bad.)

So I gave Joe a check for $500 earnest money and we signed an assignment contract giving me all his rights in his contract. Escrow will open today and will close on Friday, making this the fastest close I've done so far. Joe and his wife are getting $10,000 from assigning me this deal - their contract with the seller is for $128,000 and I'm paying $138,000. The sales contract is pretty standard and the sale is contingent upon my approval of the title report. This means even if the report shows everything is fine, if there is anything I don't like on it, I can cancel the sale. Otherwise, the property is being sold as-is.

While talking to the buyer, he asked how I got involved in this business. I told him my tale and we discovered that he actually knows my old co-worker! When I said he was a principle of BuyAZForeclosures.com, he mentioned the guy's name and I said yeah, that was him. Turns out, Joe has flipped some properties to BuyAZForeclosures before. It's a small world! We also talked a bit about the types of properties I look for and he'll keep an eye out for me. All in all, this was a good deal that included some good networking!