Private Money: Why Use a Broker When You Can Find Your Own Borrower?

Real Estate Agent with Mason Real Estate CA BRE 01444168

The first question many investors first ask themselves, once they consider becoming a Private Money Trust Deed Investor, is "Why do I need a broker?".  Another popular version of the same question is, "I just want to loan my money to a friend or family member, so why do I need a broker?”

Hey, I get it.  We all like to save money in a variety of different ways, and cutting out the middle man in a financial transaction may seem appealing.  The problem is that when you're lending significant money to anyone, it’s a bit more complicated than a handshake and a two paragraph promissory note.  It's very important for both the borrower and lender to understand the rules and regulations involved with loaning private money.

Are You Experienced?

Perhaps you sold a home on your own without the use of a licensed real estate broker/agent.  You are confident that you got the absolute top dollar and that if you had had an agent you would have walked away with 6% less, since you didn't have to pay any commissions on the deal.  You definitely have confidence in your own abilities and are savvy enough to loan money on a real estate deal that makes sense.

This next paragraph may really show you just what you don't know about lending private money for real estate.  You'll find it is impossible for you to legally make more on your transaction without a broker!  

What, you ask, “Did he really just say that?".  Absolutely!  You see while selling real estate you can sell it for however much you want as long as there is a buyer willing to pay your price. It's called supply and demand. Lending is different.  We have these laws on the books known as USURY.  I would suggest you read from the California Attorney Generals website on the topic.

You see, higher interest rates can only be charged by California licensed real estate brokers.  If you were to make your own high interest loans directly to a borrower you'd be guilty of usury and subject to some pretty severe penalties.

The Attorney Generals website has a summary of the usury laws, which specifically reads: "The usury laws do not apply to any real estate broker if the loan is secured by real estate."   This is all covered in Article 15, Section 1 of the California Constitution.

The downside of loaning money without the assistance of a licensed broker is that both you and your money are at risk - you facing severe penalties for breaking the law and your money because it maybe unrecoverable.

What a Broker Brings to the Table

When loaning your hard-earned money in a real estate transaction you want a broker that will do more than keep you out of trouble.  

The Paperwork ~ A well-established broker will coordinate all aspects of the transaction with a well-coordinated team of industry experts to protect you and maximize your returns while minimizing your exposure.  Documents will be drawn, in accordance with the latest laws; necessary documents will be recorded with the County Recorder and other authorities as appropriate; and of course provide you with the necessary year-end documentation for your taxes.

Research ~ A qualified real estate broker will not only analyze the deals he brings to you, he will screen borrowers and assess their strengths and weaknesses.  Licensed California real estate brokers have easier access to more complete information than most private money lenders can imagine.  Many consider having access to this type of information as the most important piece of the puzzle.  You can be assured that at Retaja Group, we'll ask the tough questions and get the answers long before you even know there is a deal to consider.

More Deals ~ It’s no secret that successful real estate professionals are always marketing themselves to find that next deal.  As a result, a real estate broker should have a significant database of active borrowers that do deal after deal – year after year.  Being a deal magnet, Retaja Group will market your available funds to real estate investors looking to do the type of deals you are looking to fund.

If you want to read more of my articles on Private Money, please just follow this. link.

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Until Next Time, Have a Blessed Day,

John Occhi, ePRO, REALTOR®
DRE Lic No: 01444168

ePro,John Occhi,,realtor      Certified Probate Real Estate Specialist Logo Awarded to John OcchiFive Star Logo,Certification,REO,Five Star Institute     

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This blog and the contents written here is the intellectual property of John Occhi, Temecula - Murrieta, CA REALTOR® in the South West Riverside County region of the Inland Empire of Southern California.  The views and opinions expressed are just that - views and opinions of John Occhi and those who comment.  Please note that I am not an attorney or a tax professional and any time I discuss either topic, I suggest you consult with the proper professional for relevant assistance. 

I am proud to be a full time REALTOR® who is proud to be a contributing member of the ActiveRain community.

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Comments (5)

Pam Jank
Coldwell Banker Schneidmiller Realty - Coeur d'Alene, ID
Your Coeur d'Alene & North Idaho Real Estate Pro

John, thanks for sharing the great private money lending advice with us.

Oct 31, 2012 02:38 AM
John Occhi
Mason Real Estate - Temecula, CA
SRES,CPRES.ePRO - Temecula-Murrieta CA Real Estate


Its my pleasure - I hope that I offered some insight on what many know very little about.

If I can ever be of service, please let me know.


Nov 05, 2012 09:12 AM
Wayne Johnson
Coldwell Banker D'Ann Harper REALTORS® - San Antonio, TX
San Antonio REALTOR, San Antonio Homes For Sale

John-I am learning from your posts. We just don't know what we don't know. I remember the term usury from a business law class long ago and would have thought the provisions of the law would be in effect for everyone. Little did I know.

Nov 17, 2012 01:54 PM
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