"Unlocking Financial Potential: Empowering Investors with Enhanced Access to Capital Markets"

"Unlocking Financial Potential: Empowering Investors with Enhanced Access to Capital Markets"

Hard money loan brokers make and arrange real estate loan transactions using private party investors/beneficiaries. The private parties are the source of investment capital. The investors essentially become the bank and invest their money as lenders. They receive collateral in the form of a promissory note and a recorded deed of trust, both signed by the borrower. They also receive a title insurance policy reflecting their names as lenders/beneficiaries.

Each investor owns a portion or percentage of the entire loan. If multiple investors participate in a loan transaction, all the investors are tenants-in-common. Lender/investors/beneficiaries can purchase a whole promissory note and trust deed (100%) or a fractional portion of the whole. Fractional investors hold their share with others as tenants-in-common. A $500,000 trust deed investment may have multiple investors/beneficiaries. For instance, Party-A owns $100,000 or a 20% undivided interest; Party B owns $50,000 or a 10% undivided interest; Party C owns $200,000 or an undivided 40%, and so on up to 100% ownership. All investors own their distributive shares as tenants-in-common.

Private Investors develop a relationship with the company that provides trust deed investment opportunities. They regularly communicate about new investment opportunities. They invest in loans that eventually get paid off.

There is another subset of the mortgage/loan solicitors that markets to the public for a new loan request but do not have direct access to a private party investor base. This subset essentially becomes subagents to the private money capital broker. When prospective borrowers call and discuss a potential loan transaction, they are usually unaware that the broker is not the direct capital source but must work through another company.

A problem arises when Broker A contacts Broker B, who contacts Broker C, who, in turn, reaches out to Broker D, who has relationships with private capital investors. What commonly occurs is what I refer to as “Daisy Chain” brokerage services.

Here is a classic example: A developer has almost completed his mini-storage construction project but finds himself about $500,000 short of completing the project. The developer has a $4,000,000 first lien construction loan that is nearly fully funded. Upon completion, the developer will rent units to the public until rent stabilization, or approximately 95% occupied. Then the developer will refinance with a long-term permanent loan.


A daisy chain transaction works as follows:


  1. Broker A is referred to the developer and obtains pertinent information about a real estate loan request.
  2. Broker A then contacts Broker B.
  3. Broker B contacts Broker C.
  4. Broker C has a relationship with Broker D, who works with private investors to fund real estate loan transactions.
  5. After reviewing the loan transaction, Broker D quotes a second lien position with 12% interest-only monthly payments and a 2 points origination fee for a 24-month loan.


The loan terms quote appears reasonable given the risk/reward for making a $500,000 loan subordinate or junior to a $4,000,000 first lien. Then comes the emotional rallying cry from each “Daisy Chain” broker for a piece of the action, and each demand 2 points for their fee. The end resulted in presenting an offer to the borrower to pay 8 points, plus appraisal and closing costs. You can guess what the borrower said; “Are You Nuts; H_ll No.” The participating daisy chain brokers possess a combination of greed, ignorance, stupidity, breach of fiduciary, and unconscionability. But, as expected for these characteristics, each earned zero income.


There is a dramatic discrepancy in pricing when “Daisy Chain” mortgage brokers expect a significant piece of the action. In many cases, each broker may have spent less than 1 hour, only to expect a big lottery payoff.

There is a big difference between a mortgage broker that receives a relatively small finder’s fee as compensation for passing a lead to another broker and a mortgage broker who has relationships with the private party investors. This broker has the task of procuring loan transactions, completing processing, underwriting, funding and closing, and managing private party investors, including the servicing process for the life of the outstanding loan until the payoff. One prominent mortgage broker who funds loans with private party beneficiaries indicated that he solved this problem by capping all the “Daisy Chain” mortgage brokers in aggregate not to exceed his origination fee.

State-by-state lending laws and securities regulations will differ regarding what is acceptable for a broker’s compensation or a finder’s fee.

As with all loan transactions, interest rates, terms, and fees are negotiable between the parties.  Variations will exist depending upon perceived risk, property types, locations, amenities, borrower strength, and exit strategy. Also, competition for loans and yields in the market is an essential factor.

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