I have recently been approached to offer short-term finance ($15-$25k loaned over 4 to 6 months) which would be secured by a caveat on the borrower’s property. I am led to believe that I can earn high interest (3-4%) per month with little risk as my loan is secured with a caveat. I find this a bit hard to swallow (such a high return with a relatively low risk). I would appreciate some advise if anyone has any experience with this kind of activity. Especially, what are the pitfalls?
PyramidlearnshareMember@learnshareJoin Date: 2003Post Count: 105
I think the downsides are you could not borrow any more money against the property. Nor could you sell it until the the caveat loan is paid off, and the caveat itself being lifted.
cheers,brahmsParticipant@brahmsJoin Date: 2004Post Count: 485
pyramid, i guess the pitfall is that you will lose your money as the first mortgagee will take the cake in the event of a foreclosure. and by the way, i don’t think a caveat will allow you to cause a foreclosure – check with your lawyer, but i think the ground you stand on is krap.
Purveyor of Fine Finances
aka Mortgage Broker BrisbaneMortgage HunterParticipant@mortgage-hunterJoin Date: 2003Post Count: 3,781
You will find it a truism that high returns and low risk rarely go hand in hand.
Obviously they cannot get the funds cheaper – so ask yourself why? Banks are fighting to give money away to quality borrowers.
All the best,
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0425 228 985
Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.brahmsParticipant@brahmsJoin Date: 2004Post Count: 485
totally agree with Simon – after all you are the one placing the caveat on the title.
hard to see a real strenght in this when there could be a first or even a second mortgage in front of you.
ultimately i think there is a reason WHY the offer is SO attractive – and, it doesn’t take rocket science – RISK.
Purveyor of Fine Finances
aka Mortgage Broker BrisbaneTerrywParticipant@terrywJoin Date: 2001Post Count: 16,190
Yes, very high risk. Why can’t they get normal finance?
Check out the LVRs. What other assets do they own? If something goes wrong, you will need to start legal proceedings to get your money back. If not equity or other assets, then you could be in trouble.
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Just send me a blank email, with â€œsubscribeâ€ in subject line.Colin GowanParticipant@colin-gowanJoin Date: 2005Post Count: 86
The higher the risk the greater the return so be careful.
Figure out before you look for an investment (even if its offered) if you are comfortable with the level of risk.
Not everyone is comfortable with it but there are gamblers out there who get off on high risk.
From time to time over the years I have looked for them myself however in each event I only borrowed a little extra than the bank would lend then added a little more from friends and family at a little higher risk/ interest then perhaps the last couple of thousand at very high risk/ interest just so the deal can be done in time.
In doing things this way I can average my loans and reduce my risk.
But before I go looking for any funding everything about the deal is done, business plans are drawn up, management and staff are in place, suppliers and almost always customers are lined up ready to go.
I wouldn’t invest unless some one has done their homework and dotted all the Ts and crossed all the i s first.
Basically if itâ€™s not what I would look for in an investment I improve it or walk away long before I offer the opportunity to others.
In the end your word is your bond and with an investment my ass is bonded to it big time.
Personally I keep my investment goals between 12.5% and 26%.
Or to double my money between 3 and 5 years compounded.
Below this and you may as well leave your money in a bank or managed fund.
I will consider above 26% but there must be a lot of security and trust there first.
When it comes to trust with money only extend a little more to those who have done well for you before, A LITTLE MORE AND NO MORE.
Apart from my staff my accountant checks everything before I proceed looking for money or providing money.
When all problems have been fixed with the deal and my accountant is happy then the deal is run past my solicitor.
If both of them are happy than the deal goes ahead.
This naturally takes some time, a month to over 6 months.
If the deal can’t wait that long you must decide when to walk away politely.
There is more money out there looking for an investment than investments looking for money.
But only sensible people continue to make investments, clumsy investors keep tripping on the first rung, when you realize this they don’t learn from mistakes look at history for a vision of the future.
I have not always got things right but never have I made the same mistake twice.
With age comes wisdom and anyone who has wisdom has a chequered past behind them.
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Thanks everyone for your comment. Your advice has stopped me from entering into a potentially expensive exercise.
caveat lending is not a new thing its used in the short term money market usually for 2 to 3 months, its got lots of names bridging finance, equity lending etc.
it not just on real estate it can be for every thing from an insurance claim that the owner needs to get going quicker then the insurance payout comming in and is just like your name is its a pyramid put up side down.
Its usually offered by solicitors and accountants to there clients.
You must do more due diligences then for real estate and the lend on the property must be below 80% of the value ( when I say property thats not always buildings I have seen a caveat on a contract of steel and the lend had to be paid back before the steel was shipped)
nor is it always small 15K, had one 4 months ago for 6mil on a 45 mil deal at 3% per month rate.
yes your right the risks are high and so are the returns.
you have to eyeball each deal and try to caveat some thing that not got a loan on it.
Its not everyones cup of tea and I wouldn’t put it out for 6 months.
it must be very arms lenght this type of lending and you use a big bat sometime and unless you can deal or walk away this is not the type of investing to get involved in.
I use it a part of my structure and us it as part of the start up structures for developments.
If you are going to use this for residental property you must be aware that the lender in the first and second instance are informed by the land titles office so its a good idea to pre warn them.
as some won’t like it.
mine are removed before completion and the money is usually back with in 3 months.
post any questions you like on this subject.
I haven’t heard it called caveat lending before in the open market, I must admit I call it that so It was interesting to see your post.
there are a couple of large solicitor firms that offer it and the rates vary.
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If you want to get involved in some of the projects I’m involved in email to [email protected]Richard TaylorParticipant@qlds007Join Date: 2003Post Count: 12,018
“you must be aware that the lender in the first and second instance are informed by the land titles office so its a good idea to pre warn them”
This maybe a NSW Title position but it icertainly is not in every State.
In Qld there is no requirement these days to advise the 1st mortgagee that you are registering a second mortgage or caveat.
In around 50% of all of our wraps purchasers registered caveats and i have asked the lender on many ocassions whether they are advised and the answer is no. The same goes with 2nd mortgages as i have a bit of money out on these and did not require the consent of the lender to register my charge.
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ops I forgot to put in nsw not sure of the other states.
I only do this type of lending in nsw as I have to eyeball each deal and the item that is to have the caveat and unless its a big deal I wouldn’t leave nsw and theres enough here for me.
so must say check your state.
also in wa you can’t lend more then 18% per year interest rate max unless a you are licensed and registered hence again not looking at this product for that state either.
check your state to see any problems currently in nsw there is no problem currently with this type of lending.
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Many thanks for your offer to answer more questions on this. Interesting to note your comment about solicitors and accountants offering this type of loan. In my pursuits for wrap clients, I have been approached by a solicitor to offer this kind of finance to his clients/contacts as an alternative to vendor finance. The proposal is I provide the short-term loan for a 3-4% monthly interest, the solicitor charges the borrower for setting up the caveat, etc and also gets a referral fee from me. The solicitor says that he will screen the clients, etc. so as to minimise my risk. What do you think?
couple of things.
1. caveat lending is not main stream lending nor should it be.
2. you or the solicitor can ask here or email me at [email protected] its one of my email addresses.
3.start small and use the cash that you have aquired to move forward.
4.I currently have in our little group more then 4 mil in the market and everyone looks after there little section.
5. we get between 3 and 4% per month depending on the deal but there is alot of work that is done behind the scenes.
ha if you want to get involved send me a email to the above email this is high risk and don’t risk unless you are willing to lose.
if you want information no problem I can supply that with out charge.
Its all about Learning.
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If you want to get involved in some of the projects I’m involved in email to [email protected]sachacMember@sachacJoin Date: 2004Post Count: 1
The caveat loans business is expensive but is also a very powerful tool, it exists because banks cannot act within a 48 turnaround.
If you would like further advice please contact me on 0431164869.
sjcL.A AussieMember@l.a-aussieJoin Date: 2006Post Count: 1,488
my 2 cents worth – it’s a bit like mezzanine finance where the shortfall that the banks won’t lend are made up with the funds you are looking at providing. Good returns, but if the s*** hits the fan you will be 2nd, 3rd in line to get paid. If you can afford to speculate $25k then that’s fine.
most caveat lending does not go over 80% lvr of the property that you are lending against and is a second or third registered mortgage.
there are alot a foot in this market and the person wanting the funds must go thru a broker in nsw now to my understanding.
it is not the case that the person can’t get funding from a bank or a lender via the normal avenue its that the cost and turn around in short term is alot quicker and if you need to fill a short fall for a short amount of time then is does meet a market requirement.
caveatlending.com can give you a bit of an idea of what it used for.
it is not a market that I would recommend to get involved in as the risk can be high it depends what you are investing into.
land value/ purchase 7 mil
grossrealisation land value ( or portion of the grossrealisation loan to cover the land) is 9 mil.
normal lending will only ever give you 5.6 mil so you need 1.4 mil.
now if you loc a separate property for the 1.4 mil you have the money to settle the land but then the grosslend gives you back the 1.4 mil and you cant put it back into the separate property loan or you get hit for penalties.
so you short term the 1.4 for 3 months at 3% you pay 9% for the 3 months the gross lend pays back the 1.4 cost 126k and this is charged to the project as a cost and the second property is left as it was.
this is the way we use caveatlending and is very popular.
so if you have lined up the the gross lend thru a major and you know you are getting paid out not sure of the risk levels.
the other form of it is short term mezz funding.
basically the same just you caveat lend as the mezz but for a set amount of time in which case the mezz or the clients funds come on line.
each and everyone is very different.
I have seen caveatlending down to 1.5% per month if on a long lend and 6 months is a long lend.
there are alot of solicitors that look for this funding for there clients.
hope this helps
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