Peer to peer lending has grown rapidly since Prosper and Lending Club opened their doors in 2006 and 2007, respectively. Prosper has closed over $400 million in loans to date and Lending Club just passed the $1.6 billion mark. Both of these companies provide a similar offering – the ability to invest in unsecured debt, most often for credit card consolidation. While neither of these companies are currently in the market for secured debt, the newest entrant to the P2P space, Realty Mogul, does only secured debt. All of the loans available by Realty Mogul are secured, in first position, by residential real estate.
Investing in loans secured by real estate is commonly called “First Trust Deed Investing” in real estate circles. It means that the investor becomes a private money source and loans money to a borrower. The borrowers are typically professional real estate companies who are professional rehabbers/ flippers or who invest in real estate for long term holds. The investment in the loan is secured by a document called a “Trust Deed”. These trust deeds are filed at the County Recorder’s office, demonstrating legal proof that the loan has been made on the property and is secured by the actual property. By recording the trust deed, it gives public notice to any other lenders and/or lien holders that a debt exists on the property. It also shields investors from the possibility that the property is sold without repayment of the loan. A trust deed in “first” position means that no other lenders have a claim to the property before the investor. While some companies will make and sell loans in “second” position, the safest place for investors is the first position.
One of the big differences between real estate secured lending and the unsecured loans offered by existing P2P companies is the collections process. In traditional P2P, the only way to collect on bad debt is to go after the borrower themselves and the borrower may be unable to pay on the outstanding debt. With real estate secured debt, the investment is backed by the property and the property can be foreclosed on to recoup the investment. Many times, there are also personal guarantees from the borrower in the event there is still a shortfall after any foreclosure.
Real estate secured loans may be the newest entrant to P2P, but I think we are safe to assume that it won’t be the last. Other companies have already brought the model to student loans and who knows when other asset classes like auto loans will be added to the fold.