If you’re a subscriber of the various personal-finance blogs out there, you’ve undoubtedly heard about Prosper.com. It’s a distributed lending network where everyday people loan money to other everyday people. I love the concept, but I’m also feeling left out.
Currently, Prosper.com has a lending limit of $25,000 — a gigantic sum for your average borrower, but peanuts to real estate investors. We borrow several times that on individual properties, and my companies frequently carry over $1 million in unsecured debt from private investors. Another $25,000 doesn’t do me much good.
To give Prosper some credit, they’ve started in a great niche. People are using the money to pay off high-interest credit cards and start small businesses, both of which are underserved in the lending community. Private lenders are also making a much better return than they would receive from their savings account or CD.
So yes, congratulations are in order. Now it’s time to expand.
Destroying the Hard Money Monopoly
Currently, the only source real estate investors have for fast, flexible funds is hard money lenders. They charge an average of 15-18% interest with 1-3 points of origination fees upfront. If you borrow $100,000 for six months, you can expect to pay $3000 on the front end and $7,500 over the course of the loan. Annualized, that’s over 20% interest.
Sound expensive? It is. The only way you can justify it is to make a much higher return on your investment. Many investors also pair hard money with lower interest first mortgages. For example, you might buy the house through a traditional lender and then borrow hard money to make repairs.
It’s still expensive, but real estate investors don’t have much of a choice. If a hot deal pops up that you need to jump on within a few days, then you have to suck it up and pay the hard money lender their fee. That, or pay cash for the property, which only a small percentage of investors can afford.
It’s a monopoly, and frankly, we’re sick of it.
If Prosper.com would move into the hard money market, it would substantially reduce our dependence on hard money lenders, reduce the rates we have to pay, and provide substantial profit at minimal risk to the individual lenders currently thriving at the site. The market is ripe for the picking, and I think Prosper should go for it. Speaking only for myself, I’d be willing to send about $3 million of business their way immediately.
How to Set It up
The first hurdle to overcome would be securing the larger sums with liens against property. I’ve browsed through Prosper, and I don’t currently see a way of doing this. They may have to partner with a national title search and closing company to make it happen.
Inevitably, some properties will also go into default. When this happens, someone will either have to negotiate with the borrower or begin foreclosure proceedings. If it’s a lien behind a first mortgage, then the lender will either have to pay off the first mortgage holder or negotiate a reduced settlement.
This brings up the problem of manpower. Who is going to do all of this extra legwork? I have three ideas:
1. Prosper.com: Handle everything for the lender, probably collecting a fee from the title and closing companies in exchange for sending them to business. They could also charge an increased fee to the lender or borrower for this kind of transaction, covering the cost of the additional employees this solution would require.
2. The Lender: Traditionally, the hard money lender handles the entire proceeding for themselves. They make sure the closing documents are in order and foreclose on the property, if necessary. The only problem is, this requires specialized knowledge that many Prosper lenders won’t have.
3. Specialized Groups: Currently, Prosper.com has lending groups that specialize in certain types of transactions. They could form the group specifically for loaning money on real estate. Once it has reached an appropriate size, the group could appoint someone to handle closings and foreclosures.
Isn’t This More Risky and Complicated?
Yes, and yes, but it’s worth it.
I can certainly understand why Prosper started in the personal loan niche. It’s accessible to a greater number of people, and it also takes the fullest advantage of their distribution model. Except, they’re missing out on the other underserved niches that could provide a huge amount of profit for both themselves and their lending members.
What I’m recommending here is the next generation of Prosper.com. They should target other specialized niches, such as the hard money lending industry, and develop a presence in those. Just from real estate investors, I’m sure they would pass over $1 billion in loans the first year, as long as that much money is available.
From there, they could move into the mainstream lending market and become a truly dominant competitor. Imagine getting your home loan or financing your car through Prosper.com. I think it’s a possibility, but I also think they’ll have to grow through a set of niches before reaching for the larger markets.
In my opinion, hard money lending is next.
What do you think? How should Prosper continue to expand and improve?
Other Prosper.com Resources:What’s It like to BORROW Money with Prosper? - Account of borrowing money
- Account of borrowing moneyProsper: People to People Lending Marketplace - Potential problems with Prosper
Prosper.com: Person-To-Person Lending Review - Two-part review
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This is a really interesting idea, but it seems like there are some legal hurdles there. One of the nice things about being a lender on a mortgage is the ability to foreclose. So assuming that a Prosper property goes into foreclosure, “who” would actually own the house once it’s foreclosed? The most straightforward answer would be a partnership or limited partnership, with ownership based on the percentage each lender contributed to the loan. Just to make things easy, the best thing might be to have it a LP with the number of General Partners limited somehow…. e.g. GP’s are only those individuals with 25% or more of the loan value, or (if nobody has that much individually) as many individual lenders as it takes to make the sum of their contributions over 50%. Or 30%. Or something.
So Prosper would become a sort of Partnership Registration service in all 50 states. There would be a Prosper fee for setting up the partnership and maintaining its registration. That way if the loan goes to foreclosure, there is a real business entity there to take title to the property.
As you said, pretty much anything would have to be much more complicated (and risky) than Prosper currently is set up. It would cater to a much more sophisticated lender. If I were setting it up, potential lenders would need to sign some sort of a waiver as well as pass a test in order to be able to lend in this new “Hard Money” arena.
That’s a good point. Yes, I think you would have to create a limited partnership that would own the property.
I still think they should do it though. I need lower interest loans
I think that there is a real need here, I have been trying to find sources of private money but without much success and have been forced to use hard money. It seems to me that there could be a link between self-directed IRA’s and some Prosper like market place. There are millions of people out there with IRA’s earning less than optimal returns
You need liquid net worth real property income shares with exchange-traded cyber-share markets with a private capital source for start-up costs and share price floor purchase of units for those who make a bet but have to leave the market and want a floor price for their shares.
If each area has specialized information that makes a difference in relationship to region, housing type, and sector dependent activity, and the participant market-maker must contribute that specialized knowledge in a manner that is timely:
By
*having a first-in-market position that blocks barriers-to-entry
*and is willing to trade active information for passive income to instrument backer with a tiered by traunch position,
*and created for an inefficient liquid market,
*and the offering of each unit is more for pschic income as well as a safe return plus potencial of being in a specialized situation,
*and has a market managed portfolio of property, customers/clients, and markets that can respond to threats and opportunities,
*and has information that is imcomplete and accepted as non-fiduciary,
…> then the need for the next step is the institutional mechanisms for “private personal management of pension share incomes” that can be bought and sold just like options, in a electronic-based platform.
How much can you afford to loose?
Private Equity Group would need to raise $5 billion.
Accept having 5% capture of sub-marktet property transactions in U.S. as maximun reached before regulators step-in for those you competete with.
What is 5% of $2 trillion?
2 million under performing properties with shares to be traded to somebody outside the area that does not know the market–but its liquid net worth shares would still have a steep discount or premium.
THIS IS NOT A GOOD IDEA–THERE IS ALWAYS A FIX, AND YOU ARE THE LEAST EFFICIENT INVESTOR THAT SOMEBODY WILL GET THE BIGGEST BANG FROM WITH THE LEAST AMOUNT OF WORK.
Safe rates plus portfolio rate plus special situation rate–managed by a professional that you pay a good fee–is by far the better choice for your exhange of ideas, energy, mobility, and hopes.