Peer-To-Peer Lending...It's Back and will be the next big thing!

The SEC recently approved Prosper.com's application and they are returning to the lending arena. For those of you unfamiliar with Peer to Peer lending, sites like Prosper.com, LendingClub.com, Zopa.com as well as others are places where borrowers can get loans of up to $25,000 at various interest rates.

How it works is a borrower requests an amount and sets an interest rate he is willing to pay and much like eBay multiple lenders come together to bid on the same loan and input a hidden interest rate they are willing to settle for. Once the loan is fully funded, the more lenders who continue to bid, drive down the interest rate until the close of the "auction". Terms for repayment are always 3 years but at least you know there is light at the end of the tunnel unlike Credit Cards.

I've been a member of Prosper for more than a year and was disappointed when they went dark at the height of the financial crisis due to the SEC filing. Right now they are only permitted in limited states as each state must sign off on their agreement with the Feds. While you can borrow, you cannot bid in states that have not yet signed the agreement.

Why is P2P a good thing? Well for one, P2P will jump-start lending and put more pressure on banks to begin to loosen credit. While the maximum amount isn't huge, it will be enough for many small business owners and individuals to get loans they do not qualify for through the traditional lending system. One caveat that I do not like since Prosper has been back online is the minium credit score threshold of 640. I believe this is set too high, particularly for the people who need it most, those who are emerging from BK's and foreclosures. I still contend that in the new economy a credit score of 640 will be the average as credit card companies continue to squeeze consumers by canceling credit cards, lowering credit limits and increasing % rates. This effect will increase peoples DTI (Debt to Income Ratio) giving a false impression that you may not be able to handle the situation. I believe this will be the new frontier for lending and probably have a positive effect on creating new standards by which credit is used and re-paid.
My Prosper portfolio has been quite successful and when they become fully operational, they will offer a secondary market for "selling" your notes (Just as Wall Street did!). This secondary market will be much like the derivatives in which you will be able to sell both good quality notes and bad notes to others. While I don't really plan to sell, it is designed to free up capital so you can continue to invest and reduce your risk.

I believe P2P will at some point out maneuver the banking industry and grow exponentially faster. After all it is people lending to people at a rate set by the marketplace. If you already haven't done so, I recommend you visit the sites and become a lender if you are permitted at this time. While I can only speak to my own results where I've received an 11% return on my money (with no bad loans!).

I believe helping individuals in need will make us all better and allow us to get out of this recession quicker.

Note: I am not affiliated in any way with any of the companies listed above, nor do I have any vested interest in whether you choose to join.

Residential Real Estate Investing...Getting it right!

By happenstance I ran across an article by Andrew Waite, Founder and Publisher of Personal Real Estate Investor Magazine. the article is titled "Don't let a good recession pass you by". Andrew is one of the few people who I've seen who actually "get it".

Mr. Waite argues correctly that there are 3 converging data vectors that can get you to an optimal buy in a residential vacation property: Price, rent-ability/saleability and appreciation in a buy/hold strategy. We are but a handful of individuals who recognize that commercial investment strategies transcend and apply to the residential housing market when it comes to vacation/rental properties.

Mr. Waite goes further when he correctly states that new investors (and homeowners) ignored basic principles and used easy credit to defy economic gravity getting their advice from commission driven real estate agents and mortgage originators.

Mr. Waite's confirmation, as well as my own experiences and ideology, led me to form Quantum Solutions for Real Estate, LLC. I witnessed this huge hole in the marketplace where so called "property management" companies were not doing their clients any favors and in most cases misleading them when it came to their residential investment properties. (You can read more in my blogs titled "Not All Residential Property Management Companies are Alike" and "Proper Valuations for Vacation Rental Properties")

I built my company around helping people succeed in Real Estate Investing. I dig deeper and analyze what a property (and owner) need to do to allow for positive cash flow and meeting the owners objectives. When I'm hired to manage a property I almost always get questions of "what do you need this information for"? I ask for things like mortgage payments, how long have you owned the property, what was the purchase price, capital expenditures planned or exectued, monthly or annual amounts of operating expenses, rental revenue if any etc. I analyze all of the data available and build a financial model and formulate a management plan for each property. It may seem redundent and tedious, but I know it's the right thing to do and I'm helping people succeed.

Not only do I want to know whether the property is worth my time managing, but I want my clients to know every aspect of what it's going to take to make the investment work. There have been more than a few properties I have passed on and recommended the owner sell or reduce his exposure as soon as possible. I know sometimes this information doesn't sit well, but it's honest and the numbers don't lie.

If your management company cannot explain the four principles of real estate investing and model an investment strategy that includes Cash on Cash Return, Net Present Value, Internal Rate of Return, and Value Enhancement to meet your goals, you need to run as fast as you can.

At QS4 I use this modeling as well as market data provided by local real estate agents and derive at an optimum sales/purchase price. So whether I am doing a mid-stream analysis or new purchase inquiry, I am able to create a proper valuation range for the subject property. It takes quite a bit of legwork and research, but in the end it's this analysis that protects my clients from making huge financial mistakes.

I also advise my clients when selecting a vacation home to go into high propensity markets. I tell them to use several criteria to initially narrow the process: Areas in which you frequent or visit/vacation, resort areas that attract large numbers of visitors each year, proximity to local attractions, and something unique about the subject property such as view, pool/spa, upgraded features. Remembering that you want to keep attracting those renters and offer something the competition does not.

It would be all too convenient for me to just take my clients money and be like everyone else in the market, but I plan to be around for a long time and be a leader in effecting change in the marketplace.

Follow Up to Sam Zell blog I posted 5/26

I read with amusement an article titled "No jobs for the unemployed" by Catherine Holohan in an MSN Money article posted today concerning unemployment. (you can read it here at:
http://blogs.moneycentral.msn.com/topstocks/archive/2009/07/07/no-jobs-for-the-unemployed.aspx ) The reason I find it amusing is this is exactly what I have been saying for more than 6 weeks since I started my blog. While unemployment is no laughing matter the article further strengthens my convictions that the Guru's, Corporate CEO's and elected officials just don't get it.

Ms. Holahan's closing statements while ringing true are a little late in the game. Below is the excerpt:

"Until hiring recovers sufficiently to absorb more of the unemployed, consumer spending will likely remain depressed. That, in turn, will put a severe damper on any future recovery. Consumer spending accounts for 70% of all economic activity. And, needless to say, employees without paychecks can't spend them"

So it begs the question where was everybody 2-3-4 months ago? I said then as I say now, there will be no stabilization of housing or anything else until the jobs market plays out. I wonder if billionaire Sam Zell is just now beginning to figure this out as well? I'm betting in the coming days and weeks ahead the pundits will now be changing their tune, but again what took so long? Did they not see this through their rose colored glasses or is it that hard to look down from their corner office in the Ivory Tower?

MSN Money even listed one "expert" a few weeks back (wish I could remember the article) that touted Target Stores stock over Wal-mart because as consumers were becoming more confident they viewed Target as more upscale? How rediculous is that? He was betting on Target to be the stronger buy? Laughable (unless you are the sucker that followed him).

My point is, it is the consumer who needs the bail out and stimulus. We drive the engine that is GDP not the financial institutions, auto makers, or government services.