When investors sign a private mortgage agreement, they take on the risk of losing their investment. As a brokerage firm giving access to these opportunities, it is a priority and requirement to notify potential investors of those risks. Take a look at the most common areas of risk associated with a private mortgage investment opportunity
- Every mortgage investment brings risk.
- Risk and return have a connection. When the rate of return goes up, that reflects an elevated risk associated with the investment.
- Investors should thoroughly evaluate the risk of a mortgage transaction as indicated in the Disclosure Statement and associated documentation before committing to the contract.
- Our brokerage requires that investors secure independent legal advice before signing a contract for a private mortgage investment.
- Our brokerage cannot guarantee mortgage investments. Investors that are not prepared to lose their investment should not invest in mortgages.
- In the case of investment in a mortgage other than first position, the brokerage recommends that, should a borrower with priority position default in the mortgage, the investor has a position in which it is possible to make the payments on the priority mortgage. This decreases the risk of investment and provides control over any power of sale or foreclosure associated with the default.
- In the case of a mortgage investment to pay for construction, development or commercial project, any repayment may be contingent on the project’s successful completion and/or is successful sale or leasing.
- In the case of a construction project, it is possible that the project may run over budget and end up not being finished.
- Investors should make sure that sufficient documentation exists to justify the valuation for the property as listed in the Disclosure Statement.
- Over time, the value of the property can decrease, including the time period between the last appraisal and the completion date for the transaction.
- If the property decreases in value, this can impact the investment return and/or the overall value of the investment in the case of default on the mortgage.
- A syndicated mortgage investment (SMI) has more than one lender involved. When these are related to developers, there can be additional risk beyond that associated with default; other risks arise when joining in a syndicate and when financing real estate transactions.
- Because of the complexity and elevated risk, inexperienced mortgage investors are not recommended to invest in SMI development project mortgages. Syndication also takes place for residential projects at a smaller scale, and these have less risk associated than development deals.
- Before entering SMI deals, investors should obtain a recent appraisal from a certified appraiser or inspecting the property under consideration.
- SMI deals do not have insurance from provincial governments or the Government of Canada, or any other fund designated for investor protection.
- SMI project investors may not be able to enforce investment payments individually in the case of default. Instead, enforcement must come from an authorized representative acting for the entire syndicate.
- Investors should understand the position of an SMI mortgage investment and the possibility that it could change over the long term.
- In cases of an SMI for a construction loan, investors need to know the present value of the property before development vs the value of the project after completion.
If you have interest in being added to our Direct Lending Group List, Get started HERE: https://www.coinmortgage.com/lender-signup/. Our firm is currently licensed in BC, Alberta, Saskatchewan, Manitoba and Ontario.