Mortgages are a preferred form of security in private lending because real estate has unique characteristics that make it high-quality collateral:
- Permanence and Tangibility: Unlike movable assets such as vehicles or business inventory, real property is a fixed, visible asset that cannot be hidden or easily moved.
- Legal Traceability: Ownership and all financial interests (including mortgages) are meticulously recorded and tracked through provincial land title systems, providing a clear chain of title and priority.
- Stable Value: While real estate markets can fluctuate, property values are generally more stable and predictable than most other assets, providing a reliable basis for a loan.
- Liquidity: Even a distressed or unique property typically retains a market value, making the asset easier to sell and the recovery of funds more viable than in cases of unsecured debt.
For a private lender, these attributes make the property the primary focus of their due diligence. The key questions become:
- What is the current market value of the property?
- What is my quality of title and priority position?
- How feasible is the borrower’s exit strategy to repay the loan?