NO OTHER BOOK CONTAINS THIS INFORMATION.........................II
BETTER GET OUR HEADS OUT OF THE SAND, AND FAST!........III
WHY 97% OF US WIND UP BROKE AT RETIREMENT AGE..........IV
THE JAWS OF INFLATION AND RIPOFF...........................................V
HOW INFLATION WILL CONTINUE STEALING YOUR WEALTH
- OR - "THERE IS NO GOLD IN FORT KNOXX" (part 2)
LEARNING THE MIDAS TOUCH............................................................VI
THE PERFECT CRIME COMMITTED AGAINST US ALL.................IX
AVOID FRAUD, SCAMS, AND RIPOFFS.............................................X
MANY RETIRE RICHER, RETIRE SOONER, OR BOTH!....................XIII
PROVEN KNOWLEDGE IS YOUR STRONGEST DEFENSE...............XIV
THE 37 POINT SAFE TRUST DEED INVESTING CHECKLIST.....XIV
MINI CHECKLIST............................................................... .....................XV
IN CONCLUSION.............................................................. .....................XVIII
EARN FIVE TIMES MORE RETIREMENT INCOME..........Page 3
THERE IS NO GOLD IN FORT KNOXX..........Page 5
TRUST DEED INVESTMENTS..........Page 7
TOOLS OF THE TRADE..........Page 14
LOAN TO VALUE RATIO (LTV)..........Page 21
ESTABLISHING VALUE..........Page 23
THE 50-60 RULE..........Page 27
TITLE INSURANCE..........Page 30 .
CLTA vs ALTA TITLE COVERAGE..........Page 33
FIRE INSURANCE..........Page 36
LATE FEES..........Page 38
LOAN POINTS AND YIELDS..........Page 40
INCREASING YIELD..........Page 45
WHAT THE HECK IS SUBORDINATION?...........Page 51
"WELCOME TO MONEY MATTERS"..........Page 61
FORECLOSURE & BANKRUPTCY..........Page 72 .
STOCKS -vs- TRUST DEEDS..........Page 75
WHAT THE HECK IS "HARD MONEY"?...........Page 81
37 TIPS TO SAFER TRUST DEED INVESTING..........Page 93
MINI CHECKLIST ..........Page 103
DEVELOPING A CLIENT BASE OF YOUR OWN..........Page 106
PRIVATE INVESTOR'S COMMENTS..........Page 109
Appendix A: GLOSSARY..........Page 114
Appendix B: PROTOCOL III..........Page 145
The youngest of four boys, Brad learned early what it was that he needed or wanted. He wanted off the bottom of the totem pole!
Brad lives in the gold country area of Northern California with Boots, his wife and business partner. Their home rests in a lazy valley where neighbors are not seen nor heard and where they operate a successful investment brokerage from a small computerized home office.
But Brad's dreams weren't realized overnight.
Born on November 14th, 1950 in Tacoma Park, Maryland. By the time Brad was 20, in 1970, he had his real estate license and was already working on his education in the high volume area of Concord, California.
"I got my education in this business in a very busy market" he remembers. "At the age of 22, I became for awhile Contra Costa County's youngest broker." Later he had his own Real Estate company in Benicia, California. Once I had 8 listings on the same street and I got tired of seeing my own signs!"
He soon began buying and selling property on his own, reading all of the "no money down" and other creative helpful real estate investment books he could get his hands on. Starting with nothing, starting from scratch with only ambition and high hopes.
"I had no money" he admits. "Every opportunity I had I developed myself. I bought twenty-two houses once, starting when I was twenty-four years old, with an average purchase price of around $60,000.00, and I did it with no money! That's where I gained some more of the basics of what would become some very valuable knowledge in the notes and deeds of trust investment field! This experience also provided much information about what deals investors should avoid."
"In three years I sold and refinanced every single house and every lender got every penny he had coming to him", says Brad. "It was definitely a hardship and I thought I had bitten off more than I could chew, but I swallowed the responsibility and Boots helped me every minute. I still sometimes wonder how we did it!" It took me so long to pay everyone off that the homes had appreciated enough thru inflation that suddenly for the first time in my life I had something to worry about! I remember thinking I don't have the energy to go thru that again so I'd better not lose it! I began collecting some of the very first trust deed Do's and Don'ts almost 20 years ago I guess."
He had without realizing it established himself with a few knowledgeable private lenders by accident or necessity and the next time he or a client saw a house that was a good deal and needed a little capital, a small loan secured by a deed of trust, he contacted those private lenders.
"I took the profit from the homes I'd sold and headed for the foothills to live happily ever after and strum my guitar.
Business followed Brad and he soon found himself busier than ever. "I
moved away to semi retire, but something else happened. Through referral
from other lenders I began getting more and more lenders asking me to invest
Today his company works with more than 115 private lenders regularly from a list that includes more than nine hundred, some of which are very famous people! He specializes in private construction financing exclusively now and will share that method of earning even higher returns safely in his next book.
Calling his own shots has allowed Brad to realize his musical dreams as well.
An accomplished musician, Brad has built a state-of-the-art recording
studio in his home where, with Boots and a third member, he produces the
sounds of his band, Motherlode, as well as business related audio and video
sound tracks. "It has always been my dream to move to the foothills and
play my guitar. "To have the freedom to be creative in whatever way I want"
is how I expressed my goal at age 18. The information in this book has
enabled me to achieve that. My real life has actually exceeded my dreams
EARN FIVE TIMES MORE RETIREMENT INCOME
If a tailor asked ten people to describe their favorite suit he'd get ten different responses. So, too, are the tastes of private investors varied. There isn't one single type of investment that's suitable for all. In this chapter you'll be the customer and as a tailor we'll design the investment that best fits you.
First of all let's determine what size trust deeds you should be looking for. I strongly recommend people take whatever the total trust deed investment portion of their nest egg is and divide by at least 5 or 10. Should you have, theoretically, $200,000.00 of your portfolio to allocate to trust deed investments, you should be in the market for trust deed investments somewhere in the neighborhood of $20,000.00 to $40,000.00 or less. I'm sure you are aware of the old saying, "Never put all your eggs in one basket". You will be receiving regular monthly payments of interest on each of your notes and you'll want to keep that income coming from several different places just in case one, or more, of them isn't as punctual as you might like them to be. If one of your borrowers makes his payments late or even defaults, at least that one will represent only a fraction of your monthly trust deed portfolio income. Chances are not all of your borrowers will be late at any one time.
Today, many brokers in and out of California won't broker loans with loan amounts of less than $30,000.00 for several governmental reasons. Occasionally we will do a $20,000.00 loan but only if it meets State and Federal lending laws and if the collateral is so attractive that we can't think of a reason not to. Our average loan remains at about $75,000.00 to $85,000.00 and currently we broker a lot of loans for the construction of single family dwellings (which is another book altogether).
Many ask "What if all you have is $10,000.00 to invest?". Well, it's true you have to start somewhere. Don't despair, there is a place for you in the trust deed investing business. There will be many factors to consider and they will be covered throughout this book.
You can reach retirement sooner earning high yields from trust deeds. Even the beginner just starting to build a retirement income for the future can put small, tax deductible amounts of money away monthly into a pension plan acceptable to the IRS and then begin lending small amounts of money in trust deeds, if he can find a recognized trustee to handle and service the retirement plan for him. I've set up a retirement plan account where I can do my own thing in trust deed investing with a money market checkbook monitored by a recognized trustee and my annual contributions are deductible and the interest is not taxable until I begin drawing it out to spend at retirement.
A one time $20,000.00 deposited in a bank at 7% simple interest compounded
annually for 20 years will grow to over $77,000.00 and at 7% provide $5,400.00
per year, or $451.00 per month for life without touching the principal.
The same $20,000.00 invested in trust deeds at 15% simple interest compounded
annually for the same 20 year period will grow to more than $327,000.00
and generate, without touching the principal, more than $49,000.00 per
year, or more than $4000.00, per month, and that's over 9 (nine) times
more retirement income!
THERE IS NO GOLD IN FORT KNOXX
Read the fine print on the dollars in your wallet. Those dollars no longer read anything about being "redeemable in silver". You and I can't ride the bus to the mint and trade our dollars in for real silver anymore, they are only redeemable in "lawful money" or Federal Reserve dollars. Can't you just hear Andy Rooney of "60 Minutes...." "And what is lawful money anyway? Has anyone ever seen a lawful dollar or filled a tooth with lawful money?"
What does that mean? Are the words "lawful money" referring to those new fake pennies or maybe those sandwiched copper quarters which suddenly make me wonder if someday all money will be plastic? Or are we already at this point? Especially if you consider all the plastic money in your wallet or purse in the form of Visa or Mastercard.
If my money can't be backed by gold or silver, then maybe having it backed by a house isn't such a bad idea after all. It is my firm belief that the single family home is the very building block of our civilization and people will always need a roof over their head, a place to live regardless of economic, political or social climates.
One of our tips is never lend money to a corporation alone unless the corporation owners are also willing to sign on the note and trust deed as individuals as well. If corporations really are formed to shield the incorporated from liability or limit the liability for the corporation's members, then that makes me wonder if and how far FDIC would be willing to extend their liability past the assets of FDIC. (which has been described as less than one cent on each dollar insured).
The solutions I've read on the FDIC and FSLIC's problems have ranged widely from merging FSLIC and FDIC clear through to abolishing them. This sounds like they are not getting to the real problem.
From the newsletter, "Bottom Line:" vol 11, # 24, Dec 1990.
WHAT'S GOING ON? The Federal Deposit Insurance Corporation (FDIC), the agency that insures bank deposits, has just 60 cents in its reserve fund for every $100.00 of insured deposits, a ridiculously low figure - less than half of the $1.25 government recommendation. The failure of just one major bank could drain what's left of the rapidly declining reserve fund.
If you have money in a bank that fails, it's now possible that you may
never see it again. (This 60 cents for every $100.00 is less than one
cent on the dollar.)
ROLL THAT IRA INTO HIGHER YIELDING
TRUST DEED INVESTMENTS
"Why would people want to invest in trust deeds?"
First: All trust deed investors investing for their retirement agree
that if their retirement plan dollars are stuck in a low yielding mutual
fund, a bad stock that might be going down in value, or a savings account
which is paying 2-3-4% when a trust deed can earn 10%, the trust deed can
offer that investor as much as 5 times more retirement income. Secondly:
All trust deed investors still planning for their future retirement (IRA,
KEOGH, 401K, etc.) know that through the effects of annually compounding
that 10% interest, safer trust deed investments can earn a retirement planner
five times more retirement nest egg, or even slice years off the time necessary
to reach ones current goal or target date for retirement.
"Show me the math. . ."
John puts $1,000 in his IRA at 2.5% compounded annually. At the end of 20 years that $1,000 becomes $1,638.61 and would pay apx $41.00 per year retirement income 2.5%. (using any calculator multiply 1.025 times $1,000 and punch the equals button 20 times to compound annually for 20 years. 1.025 represents "1", your initial $1,000 plus ".025", your 2.5% yield)
Fred on the other hand puts his $1,000 in one year safer trust deed
investments paying 10% for the very same 20 years which would become $6,727.50
and would at 10% then pay $672.75 per year income for the same $1,000
invested. (using any calculator multiply 1.1 times $1,000 and punch the
equals button 20 times to compound annually for 20 years. 1.1 represents
"1" your initial $1,000 plus ".1", your 10% annual yield).
It doesn't take a rocket science to understand that people everywhere
coast to coast need to live in houses. All houses in existence today had
to have been financed (or are currently still being financed) by someone
(or some entity like a bank or a savings and loan) because most people
can't afford to pay cash up front on the barrel head for something as expensive
as a home. For many years the document used to secure most house financing
was something called a mortgage. A mortgage is nothing more than a great
big IOU. Mortgages still exist in many states but over the years the document
called the trust deed developed and is now more and more widely accepted
in many states because of the more simple steps it requires (as compared
to a mortgage) to foreclose if someone stops paying on their IOU mortgage.
Although mortgages are still in use in some states today they have become
less popular than trust deeds in that a mortgage holder/investor/lender
will have to face something equivalent to a law suite in order to foreclose
on a mortgage as mortgages don't contain a power of sale clause. Trust
Deeds accomplish the same end as legal instrument used to secure debt against
real estate but by a trust deed's unique ability to assign certain rights
or powers on the lenders behalf to a neutral 3rd party trustee (normally
your title company) the need for an attorney and any lengthy legal battle
or process necessary in order to foreclose has been streamlined or eliminated.
A trust deed in simple terms sets out that if after a loan against real
property has been funded the borrower does not pay his payments on time
as agreed, the lender won't need an act of god, a judge and jury and an
attorney. The trustee (your title company) exercising your rights under
the power of sale clause contained in all trust deeds allows you to offer
the property for sale at a foreclosure sale in 90 days (plus apx. 20 days
of publication from when payments stopped) instead of being tied up for
years in court, at which time either someone shows up at that above described
sale to cash you out or the property is automatically sold and title passes
to the investor/lender. If one can learn, and remember to follow, a few
simple rules (similar to the rules that we all must follow in order to
stay alive on the highways each day) even if one trust deed does then go
awry you'll find that for example in simple terms foreclosing on a $100K
house and receiving full title to the house under the terms of your $50K
first trust deed may not be the end of the world. Today about half of all
debt secured against all real estate in these United States is through
the use of a this trust deed document. Some of our 100 private investors
think that trust deeds are easier to understand than for example learning
to invest in the stock market. After all if trust deeds secured by houses
are good enough for banks and savings and loans to invest in . . . they
should be good enough for you and I, right?
"What if I only have $10K and not $50 to invest?"
Many of our 100 investors started out asking this very question and
the answer is simple. If 5 people have the same problem wishing to fund
a $50K loan but only have $10K each, no problem as we have developed a
safe way to put those people together. At 20% ownership each in the $50K
trust deed the problem is solved. This is called a fractionalization. Each
fractionalized partner also receives a power of attorney which enables
them individually to file a foreclosure if a partner is for example out
of the country or unable to be reached on safari.
"How long will trust deeds continue to be a secure investment?"
In my opinion safer trust deed investments well secured by single family
houses will continue to hold their value so long as people need to live
"How does a "safer trust deed" differ from any other trust deed?"
In the example above of the $100K house that had to take back when the
borrower didn't make his payments as agreed on a $50K first, we had a "safer
trust deed investment" because we made sure that we had $2 of the borrowers
equity dollars as collateral for every $1 invested. Hence two to one collateral
(also expressed as 50% loan to value ratio). Now you should already understand
why one of safer trust deed investors 37 tips state simply . . . always
require 2 to 1 collateral for each of your loan dollars on houses. There
are a few more parts to that rule, such as if the home is to be owner occupied
we will allow up to a 60% loan to value ratio but for example if the loan
was on vacant land, you better keep the ratio to 3 or 4 of their equity
dollars for each of yours (25 to 33% Loan to value ratio).
"Why would I need a broker if I learn all 37 safer trust deed investing
In California there are usury laws which regulate how much interest you can charge a borrower. In California, real estate brokers are exempt from that law, so I can actually charge a borrower a fee for my services and still net you a higher interest rate than you could legally charge yourself. What's more, because I charge the borrowers for the loan there is no need to charge investors anything for our service. I can't speak for you but I would never attempt to remove my own appendix especially if the hospital said there would be no charge for the service! Would you?
"Sounds too good to be true what is the down side?"
Every silver lining has it's cloud. No investment is without risk. However, I have been licensed for nearly 26 years now and I have not seen any investor of mine lose his investment on any of the approximately 1000 loans that I have brokered. Remember what I said earlier; After all, if loans on houses are good enough for banks and savings and loans to invest in nationally they should be good enough for you and I, right?
Safer trust deed investors know that borrowers sometimes don't pay as
agreed. Although over the big picture this poses no serious threat, it
can affect your income if you are trying to rely on the trust deed payments
for you monthly income. Safer trust deed investors know all the rules though
like the one on diversification. Don't put more that 10% of your entire
trust deed portfolio into any one trust deed and if a delay arises on a
note the other 90% of your income stream is uninterrupted. Don't fund a
loan against a piece of real estate for an amount that exceeds what you
would be willing to buy the property for today with cash for. Yes, I would
be willing to pay $50K for a home that is really worth $100K because this
does happen on occasion if a borrower doesn't pay and you are forced to
foreclose to protect your investment.
"Why do you know so much about it?"
I started in the real estate business when I was 20 and sold real estate in the bay area. A month didn't go by that some deal would pop up that required the seller to carry a note when that seller needed cash. My broker had a few investors that would buy those notes. Later I began to buy real estate in the bay area and after I had accumulated 22 rentals I had a few of those private investors calling me now to buy or fund that excess needed now and then. I decided to sell those 22 alligator rental houses and when the smoke cleared there I was with now a hand full of notes myself. The next phase of my unplanned real estate career found me in the foothills (Grass Valley) building homes. The bank took so long and had so much red tape I felt like an American Gladiator simply obtaining construction financing and the nail pounding hadn't even started! The first time I used private money to build a house that retiree/investor said, "I have more funds available Brad find me some more construction loans." After building 20 houses myself I had a dozen retirees and retirement planners saying "find me another house to finance Brad". Each time I encountered a problem with a privately funded trust deed investment, no matter how small (whether I was the borrower or the lender) I came up with a solution that worked and wrote it down and 15 years, 1,000 loans brokered, 50 web pages, a lot of grey hairs and 37 safer trust deed investing rules later, I'm here wanting to share with you a recipe that has already proven itself on a thousand investments for a hundred investors for the better part of two decades.
The process grew the way it did, I guess, because somehow each investor
had a brother or sister or friend that also said "find me a new house to
finance for a higher yield Brad".
"Why would a borrower pay 10% interest when banks offer loans at a lesser rate?"
Many reasons of which I will touch on two. Probably the biggest reason is time. Most of our borrowers would like to build a home and be living in the new house in a few months instead of still finding themselves dealing with the aggravation, frustration, and verification a bank brandishes! A developer knows that time is money and a slightly higher costing private loan might not be such a bad deal after subtracting for the costs incurred for months spent waiting for bank financing.
Our analogy is that if you do have to foreclose nothing is more important than the collateral for your loan. You won't get the savings account, the spouse's income, or the sail boat. As a private investor you will learn to hang your hat on the equity in a transaction and pay a lot less attention to the irrelevant details that conventional lenders spend months scrutinizing. Verifying useless details of borrower's rags to riches to rags stories will not shield you, scrutinizing the collateral or equity for each safer trust deed investment will. Anyone with great credit can divorce, go broke, climb into a bottle, and so on. So while the bank is wasting time checking the borrower's savings account balance and spouse's income, we'll be instead looking at the only really relevant things concerning the actual collateral for our loan.
A flip side occurs once you adopt this philosophy. If a doctor with
flawless credit wants a 70% LTV loan, it's not a safer trust deed investment
and never will be one. If a divorcee who is changing jobs currently and
has no spousal income, no sail boat, and no credit established but wants
a 50% LTV loan offering us 10% and 2 dollars of equity for every loan dollar,
you can see where this loan request has just passed 1 of the 37 rules and
may result in a safer trust deed investment than the good doctor's loan,
if it can meet the rest of the criteria.
"How can I invest in safer trust deed investments with my IRA?"
Ask your accountant and your pension plan administrator if you can invest in well secured trust deed investments with the particular plan you currently have. If they say yes, we'll add you to our data base, if they say no, write to us for a list of pension plan administrator that will. Always check with your CPA however because although our 100 investors do so with everything from their family trust to their IRA, I can't guarantee that the current pension plan that you are using can.
NOTE: The following list may not be up to date, and some of the following
companies may or may not hold TD's, may not hold real properties and if
foreclosure is necessary, some may force you to transfer assets to a custodian
that will handle real property, so always be sure to check with your attorney
and accountant before choosing your custodian.
PENSCO Pension Services
120 Montgomery Street
San Francisco, CA 94104
Whether you have an IRA (KEOGH, SEP-IRA etc.) that you would like to see grow at a faster rate for the future, or you want higher yields on your investment dollars for income now, trust deeds may be just the thing for you. First you'll need to be willing to accept the fact that some aspects of trust deed investing move very slow. Second, you'll need to accept the fact that there is a minimum 1 month delay on monthly income from most trust deed investments as borrowers by nature like to wait 'till the last day to make their payment, then the bank loan servicing takes another week or two to see that the check clears before disbursing that payment, then the mail takes another few days. Trust deed investing can be slow. If you have some patience accept it, if not, TD's may not be the thing for you!
P.O. Box 31051
- TRANSCORP Pension Services
P.O. Box 31051
- Laguna Hills, CA. 92653
- tel: 1-800-821-6398
P.O. Box 5831
- Laguna Hills, CA. 92653
- tel: 1-800-821-6398
- LINCOLN TRUST COMPANY
- Denver, CO 80217
- tel: 1-800-825-2501
- FIRST TRUST CORPORATION
- P.O. Box 173301
- Denver, CO 80217-3301
- tel: 1-800-525-2124
Finally, we have too much fun sharing this with nice folks to spend
time with those that are impatient, demanding, rude or nasty. If you're
like that, no need to contact us. If safer trust deed investing interests
you and you're a nice person, contact us and give us a chance to answer
all your questions or send you our video or other propaganda! Let me know
how I can help you.
TOOLS OF THE TRADE
Whether you are an experienced trust deed investor operating completely on your own or a beginner working through a broker, there are tools of this trade.
First and foremost is the title company you choose who will act as your "Trustee". You will want to acquaint yourself with a local, professional title company. One that you know to have a good reputation. Don't be afraid to call around to real estate offices and ask them for referrals to the most popular title company in your area. Don't hesitate to visit title companies, introduce yourself and ask them to convince you to bring your business to them. Then remember, you're looking for good, accurate, professional work, not personality. Ask if they make property profiles, offer ALTA coverage to private lenders, have a courier, a fax machine and are computerized, etc.
You will also need a local fire insurance agent. Although fire insurance should always be handled in escrow (and prepaid by the borrower) at the time you make the note, occasionally a borrower will not make later payments on his policy or will let it lapse for some other reason in which case you will be notified and will have to quickly get a binder to protect your interest if the house burns. You'll want to make sure that under the terms of the deed of trust the borrower is required to keep an active fire policy on the property naming any lenders as loss payees on the policy. Since you are named on the policy as loss payee, you should have received a copy of the policy and should always be notified if the policy were about to expire for any reason. Of course, the borrower is responsible for this and if expiration occurs he (the borrower) is technically in default as adequate fire coverage is required by the terms of a standard deed of trust here in California. The first action for you to take as the lender suddenly in jeopardy without coverage would be to get a new binder yourself and bill the borrower. That is where a professional and cooperative local insurance agent who is as close as your phone comes in real handy.
In order to get the highest rate of return, you need to constantly stay in touch with your broker in your area and at the same time keep one finger on the pulse of the market. There are times when I am trying to fund a loan at the last minute for one reason or another and I see investors almost daily lose out on funding some really good deals simply because I am unable to reach them. I encourage my investors to have an answering machine hooked up in their homes. Remember, time is of the essence, you're product will be money, but money quickly.
A VCR in your home can also be helpful. Occasionally a broker will videotape a property and send you the tape for viewing to save time and travel on your part.
Call waiting can also be an invaluable telephone service, particularly to investors. It enables your broker to reach you even if the kids or grandkids have the telephone held hostage!
Another absolute must is a P.O. Box. You would never want to give out your residence address and chance being disturbed by unannounced borrower visits. On numerous occasions borrowers have become an extreme nuisance to lenders who disclosed their home phone numbers or street addresses. I strongly suggest you obtain a P.O.Box rather than using your street address to collect payments. (Also, never allow a borrower to make any payments by way of direct deposit to your bank account.) Borrowers will hound you relentlessly for extensions, additional advances, personal loans, etc. You will get less of this type hassle if a borrower has to write to you rather than phone or visit!
With the advent of the information highway, the internet, unless you want to be forgotten, one should have and e-mail address.
Lastly, a fax machine can be a very useful item, I couldn't do business without one.
It would be very difficult to build a house without a hammer and saw
or other basic tools. As a matter of fact, it's difficult to operate any
craft, service or trade without having the basic, proper tools of the trade.
Notes and deeds of trust are not for everyone. Even though they can be safe, high yielding and fun if done properly, they're just simply not for everyone because they do require some management. And let's face it, it is also a fact that a lot of our so called "B" borrowers have less than flawless credit and don't have a million in the bank. If they did, why would they be willing to pay as much as 14.5% interest on borrower money? It can be a problem if you are depending solely on every penny of the monthly payments for your living expenses. I would suggest keeping a 6 to 12 month reserve buffer fund if this is your situation.
Trust deed interest payments commonly come late. Some people worry if a single payment comes late, even with a six to ten percent late charge bonus. Some people can't sleep nights if a loan is paid back thirty days late even though it was with interest, and even though a higher return was yielded. One lady took her money out of her low interest checking account and bought some notes yielding 15%. When a few payments came late, and even though her money was secured by 2 to 1 collateral and she got her late charges, she said, "This is too worrisome for me." When the loan paid off, she put the money back into her low interest checking account to stay. I guarantee you that inflation will eat up her nest egg. Do you remember when people actually retired with a nest egg of $30K? The longer you are retired, the worse the effects of inflation are on you.
Another perfect example would be one lender I recall working with who, on his very first loan, received the first few payments a few days late, and every single time the borrower diligently paid the required maximum late charge. These late charges boosted the lenders yield considerably, but he still made about a dozen phone calls to me for each late payment. This guy really went bananas! I felt sorry for him. He was approaching a nervous breakdown even though his loan was very secure, no risk was at hand!
The loan was a $50,000 first on a $100,000 property and at no time was his $50,000 investment ever in jeopardy. Even if the borrower had refused to pay altogether, he could have gone through foreclosure and in less than six months taken the property back and probably made over 100% interest on his investment instead of 15%, even if he chose to sell the house for below market value for a quick sale.
The borrower continued to make late payments and the lender continued to call me every night that the payment was not received to tell me it had not arrived yet, and I continued to explain to him that his position was secure, and he continued to worry more and more until I finally concluded that notes and deeds of trust were just simply not for him. The other 100 investors accept the little headaches in exchange for the high yields.
In the end a friend referred him to an investment broker who suggested he buy something I'm not familiar with called Ginnie Maes (at a much lower yield, 7% as I remember it). Now he worries about his Ginnie Maes but he's calling the stock broker everyday not me, thank goodness! Trust deeds are not for everyone, this is a fact.
I later discovered that this lender actually had a much smaller investment portfolio than he had originally told me and that he was depending solely on only this interest income alone to live on. He had broken the rule of diversification. Instead of loaning only 10% to 20% of his trust deed portfolio portion on any one particular deed of trust, he had lent closer to 50% of his total investment portfolio all on one note and it was affecting his peace of mind, not to mention his marriage. Because he depended on the interest income he couldn't afford to deal with a borrower who was late, particularly since that payment represented 50% of his entire income. Understanding the facts and following the rules can sometimes eliminate unnecessary worry.
Worry can be the straw that breaks the camel's back! If you know that your investment is very well secured and you've been treating every deal as though you were going to have to take the property back, and you're confident that you've established an accurate value of the property, and you're confident in your title insurance coverage, and you've put the investment to the checklist test and it has passed that too, then there shouldn't be great cause for continuous worry. The best investor worries a little as a little worry is healthy, but at the same time the investor can put an end to that worry immediately because he recognizes that the nearly 2 to 1 real estate collateral makes his loan very secure.
Another excellent example of unnecessary worry is the story of an investor I met about ten years ago. We had a wonderful relationship and he funded many loans through me. I really enjoyed working with him, however, he was what I considered to be overly cautious. Now don't get me wrong, a little bit cautious is good, but overly cautious is not. He scrutinized every word of every sentence and every item like no one I had ever met before or since. He stayed awake nights worrying about why one word was used in the fine print rather than another and nit-picked at all the irrelevant points, and missed most of the relevant points. I had never seen anything like it. I liked him a lot though, or I would not have continued offering my free brokerage services to him.
Sadly he later passed away and his wife had to take over where he left off on his trust deed investments. She initially wanted to phase it out slowly as the notes came due because she didn't know anything about it. Later after a small amount of exposure to trust deeds she decided to try funding a few loans through me herself. She has since become one of my best and easiest to work with investors. She has developed confidence now and she never seems to worry excessively or needlessly. She has actually become, in my opinion, a much better investor than her husband was, realizing that there is no large dangerous risk of loss but instead only the realistic risk that she might someday have to redeem a home in foreclosure and hire a painter and a realtor to fix it up for resale. As you know, I like to compare investing to driving. There are rules to follow cautiously in order to survive on the highway, but an overly nervous, neurotic, or scared to death driver in a panic can be as dangerous or even more dangerous than an overly confident one. Worry a little, it's healthy and necessary. Use a little caution, it's healthy, but above all, follow the rules and be patient, you will get there safely.
The major point here is that there is a great deal of excitement and
fun to be had investing in notes and trust deeds, in my opinion, if you
do a little homework. Don't let it be overshadowed by worry which can only
come from doubt. Erase that doubt and remember, "Worry is like a rocking
chair, it gives you something to do but it doesn't get you anywhere!" Instead,
expend that same valuable energy checking the vital signs of each trust
deed with the easy checklist in this book and you will know whether or
not any trust deed is good or bad! Don't worry! Be happy! Oh yeah, and
follow the rules! Also, start noticing how much equity lending is constantly
going on around you every day.
A trust deed is a signed and notarized legal document, a piece of paper that secures the note and loan you make to a particular piece of property. The deed of trust shows the borrowers name(s), the lenders name(s), the loan amount, and the property that the loan is against. The trust deed contains a "power of sale clause", this clause gives the title company (the trustee) the power to sell the property for you, the lender, in the event that the borrower doesn't repay the loan as agreed. The trust deed is recorded and made a matter of record in the County (public records) where the property is located. The trust deed is signed by the borrower(s) and notarized, and specifies the parties, the amount, and a legal description of the particular parts of real estate securing the loan.
Accompanying the trust deed is a note, a promissory note, or a written promise to pay a certain sum of money to a certain person on a certain date. The note also states the interest rate and other terms of the loan. The note is signed by the borrower(s). There are many types of notes in many shapes, lengths and sizes.
The borrower is called the "Trustor" and the lender is called the "Beneficiary". It's easy to remember who the beneficiary is because he "benefits" from the payments on the loan. It's easy to remember who the trustor is because he's the one you "trusted" to pay the money back! That's how I remember them.
What determines the position of a new note and trust deed, a first, a second, a third or even a fourth? Do you know? It is determined only by the date and the time that trust deed was recorded. If I own my property free and clear today and at 2:30 in the afternoon I gave you a note and trust deed for $10,000 and at 2:45 you recorded it, but at 2:43 I had given someone else a note and trust deed and they had recorded it at that precise moment (2:43), then the very first note I gave out would become what? It would be a second because the position is only determined by the date and time of the recording of the deed of trust. That's why it is so, so, important for you to always receive title insurance and transact your business through a bona fide and reputable title company to protect you. (The position of existing note can be altered thru the use of a subordination agreement.)
If I gave you a note and deed of trust on my house last year, and I
owned the house free, and clear and you never recorded the deed of trust,
and I gave someone else a note and deed of trust today and they recorded
it today, your note would be a second and their note would be a first because
theirs was the first one recorded. This is why you never make loans without
going through a bona fide, reputable, title company. The title company
is your "Trustee", the middle man. Always use a title company and get title
insurance guaranteeing your loans actual position.
LOAN TO VALUE RATIO (LTV)
LTV, loan to value ratio, is the ratio between the total of loans (your loan and any loans ahead of you only) divided by the value of the property.
On a $100,000.00 house we have only one loan, a first of $50,000.00, or 50 cents on the dollar, or 50% loan to value ratio. The loan represents 50% of the overall value of the home.
If you had to foreclose and take back the house and sell it quick for
$90,000.00 what would the return on your investment have been?
($90K take away $50K = $40K divided by 50% invested or 80% profit.)
What LTV would you have if you had a $25,000.00 second on a $100,00.00 home hat had a $10,000.00 third on it?
In this case you need to know how much the first is because, in figuring your loan to value ratio, any loans ahead of yours must also be considered. In this case we will say that the first is also $25,000.00 bringing the total of your loan and all the loans ahead of you, the loan amounts you are concerned with, to $50,000.00. So, again, we have a 50% LTV. Remember the hard cold fact is that you don't care about how many people are behind you in the soup line, but you are very concerned about any of those ahead of you.
1)If the house was worth $50,000.00 and the first was $25,000.00, what would the first's LTV ratio be? (50%)
3)If the house was worth $150K and you were asked to purchase the existing $10K third which supposedly represented no more than a 60% L.T.V. ratio, how much is the largest possible allowable amount the first could be?
In this example we have a vacant lot worth $60K.
The borrower owes $10,000 and the lot is worth a solid $60K. He wants
whatever the maximum is that you will give him. We don't like vacant land
seconds and we only lend 1/3 on land so....
(33 1/3% LTV x $60K lot = $20K total maximum loan commitment.
We would be willing to lend him a new $20,000.00 first on the lot if he will pay off the existing $10,000.00 first in escrow. He will net only $10,000.00 less his costs after paying off the first. We don't fund seconds on vacant land.
Obviously, you would never be able to establish a single loan to value ratio in terms of dollars without first establishing the actual market value of the real estate collateral in terms of dollars because: LTV = total loans divided by value.
Broker and investor, should arrive at an accurate market value for each property used as collateral and it should be a value that you have complete confidence in. This doesn't mean that you always have to get an MAI or an FHA appraisal. It doesn't even mean that an expensive written appraisal is always necessary. But it does mean you must always establish a value that you have full faith and confidence in and not based on any single one appraisal. Know, in your own mind, what you would be willing to pay for the property if you should ever have to take it back. There are several different ways of arriving at the fair market value of a property and a professional appraisal is usually only one. I will, however, go over some of the more popular approaches to value available to you.
An FHA appraisal is probably one of the most conservative and accurate appraisals you can get on improved property. If you want a very strong indication of the value of a single family home, order an FHA appraisal. They not only tell you the value of the home but will also make recommendations as to what the house needs to bring it up to local codes, etc. However, I've seen FHA appraisals take up to six weeks, and longer, to obtain, and they're not cheap. You can purchase a comprehensive FHA appraisal without necessarily pursuing FHA financing.
From my experience, the next most accurate appraisal would be a VA appraisal. Because it's purpose is for a Veteran to obtain a government guaranteed loan and the government wants to help them, the VA appraisal always seems, in my opinion, just slightly more liberal than the FHA appraisal. When I was selling real estate, VA appraisers always seemed to be willing to bend a percent or two as a courtesy to meet the contract price of the house, whereas FHA appraisers would not.
Conventional appraisals are usually unavailable unless the borrower is or was going for a conventional loan and had obtained a copy of one and already has it in his possession. Sometimes a local appraiser will not have FHA or VA authorization but has a reputation for providing a good appraisal.
Last of the most common written appraisals is obtained from an independent appraiser. Most appraisers are very diligent and very accurate and very thorough in their appraisal of a property, but there are a few who are not, and those are the ones to look out for. I've seen these unreliables appraise a pole barn for $35.00 per square foot when $5.00 to $10.00 would have been much more accurate. The appraisal is really no better than the comparable properties listed, sold, and outlined in it and you can checkup on these comps. yourself if skeptical. You can drive by.
Don't feel that you have to have an appraisal just for the sake of being able to say you have an appraisal, and don't ever rely solely on any one appraisal of value. Also don't think you have to be an expert appraiser yourself. Be flexible, be smart, be thorough and be safe. If you would be willing (after investigating the market) to pay the appraised price for the property, that's a very good indication that the market value is realistic. Learn some of the following simple steps toward evaluating a property yourself so you will never have to nervously rely on someone else's opinion alone. With the checklist you'll always remember to check this stuff. None of it can slip by you so long as you use the checklist in this book at every closing.
There are three very good ways to determine for yourself how accurate the appraised value of most any conforming property is. Weird or unusual (nonconforming) property should be avoided.
#1 If the property has sold or changed hands in the last eighteen months, use that value as the value of the property. We are also willing to add for all subsequent cash improvements if any were made. This would be the number one method. After all, what better comparable sale can you get than the subject property itself?
#2 The second way is to check on other comparable properties in the area that have actually sold and closed escrow, actual sales only, asking prices are of little or no value. Sales that have closed escrow are called "comps", and comps are what appraisers use to make their appraisal by adjusting up or down for a smaller garage or lack of a pool, etc. If you can find the same or similar house with the same or similar floor plan that sold around the corner, use the sale price of that home and adjust either up or down when comparing it to the house you are trying to evaluate, take away for what the comp may have that the house you are evaluating does not have and vice versa. Never use the asking price or listed price of homes for sale not yet sold in the area, they may be unrealistic. Only compare actual sales that have closed escrow. If you have to add or subtract for adjustments that's fine, just be accurate, factual, thorough and realistic.
#3 The last and third way is to estimate in your own mind your own thumbnail appraisal of what it would cost to replace those improvements on that particular parcel of property. This is very simple, if you check with at least five local contractors asking them what the cost of a standard, basic home per square foot is you will be able to come up with an average figure to multiply by the square footage of the home you are trying to evaluate. In this case we are talking about the improvements only and you will have to resort to comps for the land value to add to this. Also, give consideration to extras that may not be included in the basic square foot cost figure such as upgraded fixtures, a pool, landscaping, decks, workshop, etc.
Your broker can help you with this, and befriending appraisers and local real estate professionals that need your services as well can be very helpful. What the home has sold or changed hands for in the last 18 months is obviously the best way for you to be assured of the value. The second way is through checking into comparable sales in the area. The third way is to calculate the cost to replace the home. 1, 2, 3, ways you can use to check the accuracy of an existing appraisal and confidently establish value in your own mind. Always insist on an appraisal and then always establish your own opinion of value to be used in arriving at the suitable loan commitment to offer.
If a borrower produces an appraisal, check on it, question it. Never
just accept a stated property value without establishing in your own mind
a confidence in that value. The value you accept could be the price you
may have to sell the property for to recoup your costs after foreclosure!
And, if too unrealistically high, you could be in serious trouble. Think
of it as though you will have to buy every single property in foreclosure
for the value you have accepted, and by the very nature of this approach
the chances of you ever having to foreclose will be greatly reduced and
should a foreclosure happen to occur, the property's real market value
can never come as a shock to you. Build your own collection of good comps
to refer to if you can.
If you are unable to confidently place a value on a property then I suggest that you pass on that deal, as there are a dozen more to replace it if you are making yourself available.
I would like to add that even the best, most accurate appraisal is still,
at best, nothing more than an approximation or one mans' opinion of value
because there are so many variables and unknown factors that can affect
value, i.e., terms, motivation, interest rates, etc. In loaning up to 60%
of the value, I have found that even if the estimate of value is off by
5 or 10%, you will still have plenty of loan security.
THE 50-60 RULE
Single family homes . . .
When arranging loans on prime single family houses I feel that my "50-60 Rule", as I call it, works best.
When you're considering loaning on a nice single family dwelling, the property is prime and in a good location, and there is no question but that this is a first quality, desirable property, then the 50-60 rule says you can loan up to 60% of the market value of that property not 60% of their equity but 60% of the homes value, so long as it is owner occupied. Non owner occupied may reduce your commitment to 50% or 55% LTV.
When you're looking at a not so desirable improved property, say it's too far from town, or a bit too run down, or maybe it's just a strange floor plan or funny shape, but you still want to lend on it, then you will not want to exceed 50% LTV, (loan to value ratio), of the value of the property. Don't exceed 50% loan to value ratio on less than primo or prime quality houses.
Loan up to 60% of the value on REALLY good IMPROVED single family property and stay at or below 50% of the value if there is any reason to feel this is not prime property, or any spot in between. A sliding scale from 50% LTV to 60% LTV.
Commercial real estate and vacant land or unimproved property are a totally different story altogether and I will cover that in great detail for you later. We arrange loans for up to 1/3 or 33.3% LTV ratio on vacant land, lots or even improved commercial property and never more, unless you actually want to buy it for more.
Again, I am talking about loan to value ratio or LTV. The LTV is the loan amount in relation to the value of the property. Don't ever forget that if you are doing a loan in a junior position you must always figure the amount of any loans ahead of you added to the amount you are loaning and then divide that total by the market value to determine the LTV.
Cast the 50-60 rule in stone, tattoo it on your arm if you must, but
don't forget it, don't break it, lest you want to own some property around
town by way of foreclosure! At 60% LTV there's even a little built in room
for error and you'll still never probably have to take one back.
Vacant land . . .
With respect to lending against real estate other than single family residences, i.e., commercial real estate and vacant land or unimproved property, we use a different rule altogether. I will arrange first trust deeds only (no junior TD's) on commercial property and vacant land, and even then only up to one third of the actual market value of the property, unless it is a parcel that I feel I wouldn't mind owning myself, then occasionally I'll sometimes go up to 40% or 50% LTV maximum.
33.3% is the rule for all vacant land. If you want to be assured you will never have to take back vacant land then never go over 33.3% LTV and you'll never have any trouble. Remember, you can't normally collect rent on vacant land and it's hard to sell!
Lot F is worth $30,000.00. The owner approaches you for a loan. Having verified the $30,000.00 value of the lot, how much will you loan? $10,000.00 is the answer if you are playing it perfectly safe. If this is a piece of land that you wouldn't mind owning because it adjoins your own parcel and you've always wanted it, then you might even consider stretching it to $15,000.00. Of course there is always a third choice, if you dislike the land for any reason you simply say "Thank you, I'm not interested" and there will be 10 other deals to pick from in it's place! Also, we have a $30,000.00 minimum, so I would pass on Lot F.
Loaning only one third on vacant land won't cut out prospects either because a borrower can always get somebody else to loan money behind you, and we don't care how much money is behind us ever, we only care about our loan and all loans ahead or in front of us from now on. Remember, loans behind you are almost a form of additional insurance, in my opinion, because they will be wiped off completely if you should have to foreclose unless they pay you off. To me, that's almost like having another borrower on the hook to you. I feel loans behind mine are a plus or a bonus, but never confuse them with loans that are ahead of or senior to your loan.
On raw land however, make sure you're in first position at no more than
33.3% to 50% LTV and you'll be the first in line to be paid off if the
deal ever sours and gets to the court house steps. If the borrower scoffs
at your 33.3 % loan offer, don't fret, there's a dozen more who will jump
at it if you are making yourself available.
A guy who began riding a motorcycle decided to buy a helmet. He went to a motorcycle shop and found several helmets, all with different price tags. " Which helmet should I buy?" he asked. The salesperson replied, "Well, if you got a $5.00 head then you buy a $5.00 helmet." . . . . What's your head worth?
Title insurance to you, an investor, is much like the helmet to the motorcycle rider. Eventually, it may save your life. I happen to think my head is worth a great deal, so I would buy the very best helmet, the most expensive helmet on the market. When I broker a loan on a piece of property, I insist on the very best, most comprehensive and usually most expensive title insurance available, the A.L.T.A. policy. Here in northern California, title insurance is always paid for by the borrower, costing the lender nothing.
There are two basic types of title insurance available to you. One is C.L.T.A. standard coverage and the other more extensive "Rolls Royce" coverage is the A.L.T.A. policy. Both of these title policies will cover against loss or damage as a result of defects or liens or encumbrances in the title, lack of right of access to and from the land, and the un-enforceability or invalidity of your note and trust deed. With title insurance you are assured of the position of your note and trust deed, and you are assured that the property you have loaned on does indeed belong to the person you loaned the money to and that you are covered as to any loss due to these matters. In addition, with the A.L.T.A. policy you will be covered against everything else like encroachments and mechanics liens. There are also additional endorsements available to cover, for instance, placement of a new foundation, mechanics lien coverage, or just about anything else you can think of.
I always insist on complete lenders A.L.T.A. coverage for every lender on every loan I broker, it really is the Rolls Royce of coverage or the best coverage available. A.L.T.A. coverage is what savings and loans and banks get for themselves so why shouldn't you? Sometimes it's difficult for a private individual to get A.L.T.A. policies, but if you're working with a broker who has enough business going through a title company, they can usually get A.L.T.A. coverage in most counties....I've proven that myself.
Never make a loan to anyone without the entire transaction and all money being handled through an independent escrow by a reputable title company. And NEVER make a loan to anyone without a policy of title insurance on that property issued by a reputable title company through escrow by a reputable title officer at the close of every loan escrow. Hundreds of investors are ripped off every year by thinking they're getting a first loan when the loan is actually a 3rd, 4th, even 5th loan. This cannot happen if you obtain title insurance every time.
One large trust deed investment firm in the bay area went into bankruptcy. It seems they were selling investors seconds on property that were really thirds, fourths, and even fifths! There were millions of dollars involved. Apparently, not even one of these investors insisted on their own title insurance policy, if they had they would have received a preliminary report showing the status of the property and they would have seen in the report the items they were not being told about. Later, I heard the same man bilked investors a second time, in the same state, by starting another company with another name!
So again, always insist on the best coverage possible and always check the pre-lim (preliminary title report.) This is an early report, provided by the title company for you, telling all items of record for your information.
Whenever approached by borrowers and investors alike I always insist we use my title company or usually won't be as motivated to do the deal. Over a period of years the title company I use has learned to draw my papers the way I want them. They know how I like my deals structured and, true to the old adage "practice makes perfect", they don't seem to forget anything. For me to try to do an escrow with a brand new escrow company that has no idea who I am or what I want would just not be worth it, especially in the complex area I currently specialize.
A good escrow agent can also prove to be another good form of insurance. If you have an escrow agent that you feel confident working with, and that you know understands how you operate (having worked with you before), and that you trust and are comfortable with, then you can relax and let her do her job without losing a lot of sleep. Of course it takes some time and effort to build that kind of relationship, but once you have you can rest assured that your best interest will be at hand. My escrow person was the vice president of the company and she never made a single mistake on a single document in any of the hundreds of escrows she has done for me and her assistant is equally as dependable. Try to get into the habit of using one company only and the deals will get easier and easier as time goes by.
CLTA vs ALTA TITLE COVERAGE
What the heck is an ALTA lenders policy of title insurance?
As a safer trust deed investor you should always demand that your broker provide you with a full extended ALTA lenders title policy with no deletions! Brad Evans Real Estate Loans investors are given full extended ALTA title policies with no deletions on all trust deed investments brokered (plus a foundation endorsement and a potential ALTA rewrite where necessary on all construction loans).
What the heck does that mean??
There are generally two types of title insurance policies used. CLTA (California Land Title Association) is insuring against loss including attorney fees (up to the purchase price for as long as he owns the property) due to all matters of record, fraud and forgery, and it assures that title is being vested in the person shown on the policy.
The ALTA (American Land Title Association) policy covers the same items as the CLTA policy as well as many additional risks such as unrecorded mechanic's liens, assessments, encumbrances, encroachments, easements, water rights, mining claims, patent reservations, conflicts of boundary lines, shortages in area access to and from the land and other visible matter, as the title company performs a physical inspection before it issues an ALTA policy.
Institutional lenders (as well as Brad Evans) demand an ALTA policy as it insures the lender against loss for the entire length of the loan and against the un-enforceability or invalidity of the note and deed of trust.
Some ALTA policies will list deletions. The most common deletions may exclude mechanics liens on construction loans with broken priority, i.e. any construction was started before loan escrow recorded. Some ALTA policies list so many deletions they begin to resemble the more limited coverage CLTA policies provide.
You can see why it is so important for you as a lender to obtain the most protection available. You can also see that if your coverage is called ALTA but has deletions you may really only be getting the equivalent of CLTA coverage. Always obtain the maximum title insurance coverage available.
Excerpts from "California Title Insurance Practice" by John L. Hosack:
The ALTA loan policy insures the lender against loss or damage up the policy limit, plus costs and attorneys fees incurred under the policy that are caused by (1) title being vested in a person other than the one shown in the policy, (2) title defects, (3) liens and encumbrances, (4) lack of a right of access to the land, (5) marketability of title, (6) prior mechanics' liens, and street improvement assessment liens. In addition, the policy insures the priority and validity of the lender's lien on the property, except to the extent that the insured encumbrance is invalid or unenforceable due to usury, the effect of any consumer credit protection, or truth in-lending laws.
In addition, policy coverage is extended to the following matters that
are ordinarily excluded from the CLTA standard coverage policy: off-record
defects, liens, encumbrances, easements, and encroachments; rights of parties
in possession or rights discoverable by inquiry of parties in possession
and not shown on the public records; water rights, mining claims, and patent
reservations, and discrepancies or conflicts in boundary lines and shortages
in areas that are not reflected in the public records.
EXCEPTIONS TO COVERAGE
The primary difference between the ALTA loan policy and the CLTA Standard Coverage Policy is the omission of the standard exceptions contained in Schedule B, Part I of the CLTA policy. No standard exceptions are set out in the ALTA loan policy. Instead, the title insurer will list specific matters that constitute exceptions to the coverage of the lender's lien.
Matters that constitute defects, liens, or encumbrances on the title
and that would be subordinate to the insured lien are set forth in Schedule
B, Part II of the ALTA loan policy. In most cases, such matters would be
listed in the preliminary title report issued by the insurer before closing
of the transaction and issuance of the policy and the lender would require
them to be deleted from the policy.
When loaning on improved property there is always the threat that the improvements will burn and unless you have a fire policy in force you'll have a loan secured by ashes.
Never, under any circumstances, make a note and deed of trust on improved property without fire insurance coverage adequate to cover the full replacement of the improvements, investigate to be certain it's adequate. Ask for more coverage if necessary. See that the policy is paid for a year in advance, collected in escrow. If not collected in escrow, there is the possibility the payments won't get made and the policy will cancel. Make certain that you are named in the policy as loss payee when you close the deal.
The policy will lapse or cancel if time runs out or the payments aren't made. I always have my title company collect for a full year in advance in escrow, but sometimes even this isn't enough safeguard. What if the note is written for more than one year, and when the first year passes the borrower has the option of going to monthly payments on his fire insurance? It's up to you to stay abreast of fire insurance. In my opinion, lack of fire insurance poses the biggest single potential threat in trust deed investing. You should always be notified, as loss payee, by the insurance company, of any pending changes or interruption of the policy as required by law. Don't take the notices lightly, be sure to follow up and see to it that you remain named as loss payee and that the insurance stays in force.
I brokered a $20,000.00 note and deed of trust funded by a friend of
mine. A few months into the loan term on a Sunday afternoon I received
a phone call from him. "Brad," he said, "did you see this mornings paper
where the house I have the $20,000.00 note on burned to the ground? The
only thing left is the lot!" He wasn't worried about his investment, however,
because he had a copy of the fire policy on the house listing him as loss
payee. It happens, don't ever believe you can get by, even briefly, without
fire insurance. You sure wouldn't want to hear one day that a place you
were going to get insurance on had burned down and now it's too
There was an incident where a borrower allowed the original policy to run out and did not renew it. The investor received notice that the policy was approaching the cancellation date. He notified me right away and I chased it down. The borrower had decided to go to a new insurance company when it was time to renew and failed to have the investor named on the new policy. This was easily remedied, but if the investor had not taken heed of the notice he had received and if the house had burned down without him being named, there would have been a problem. Fire insurance is on the checklist.
In accordance with California law the maximum allowable late fee you
can levy is still a topic of debate among lawyers and title companies.
I understand the maximum is 10% of the payment amount due on payments received
no less than ten days late on non owner occupied property and 7% or less
of the payment amount received late on owner occupied property. I have
always used a 6% late fee after 10 days late on owner occupied property
feeling that this is a fair amount. Consult your title company, broker,
and lawyer for their policy however, as my figures may be incorrect in
An acceleration clause can be put in the note and deed of trust that states that the entire principal sum will be due and payable in full if this party should sell, convey, further encumber, in whole or in part, the property securing the note and deed of trust.
An acceleration clause is more or less a "due on sale" clause that can be extended to "due if you get a second loan", "due if you transfer title", etc.
Generally, I believe that if there is not an acceleration clause in the note, it is a loan that CAN be assumed. If there is an acceleration clause, it is a loan that CANNOT be assumed legally without the lender's permission.
I am not a lawyer and hesitate to trying to recite case histories regarding acceleration clauses and which loans are and which loans aren't *callable, and if I did, the information would be boring and you wouldn't be any more enlightened about acceleration clauses than you will be once you've read this.
I always include an acceleration clause in all notes and deeds of trust
I broker as standard policy, then there is no question as to what the intent
is. We don't want anyone to assume any loan without going back through
the broker for many reasons. If the new borrower looks O.K. and will have
some equity in the property and is not going to negatively affect our security
interest in any way, for a small and reasonable fee the investor may be
willing to allow the loan to be assumed for the balance of time remaining
on the note.
* To demand immediate payment in full of principle and interest is to
LOAN POINTS AND YIELDS
NOTE: Although we used to share a portion of the loan fees paid by the borrowers with the private investor(s) funding the loan as an added incentive, and may in the future do that again, we have currently suspended that practice. Brokers needing to attract new investors may find offering to share points an attractive incentive.
A "point" is another term for one percent. The reason a point is not referred to as a percent is because the interest rate is expressed in percentages. Points are sometimes given as bonus interest over and above the notes specified face interest rate. Interest is always calculated annually for every year of the note and points are only calculated and collected once, usually at the close of escrow.
Loan fees are always expressed in loan points, one percent each, and sometimes shared between the broker and the investor. Points will increase yield considerably.
For example, if you had funded a $100,000.00 note that was paying a total of 15% interest you would collect $15,000.00 annually. $100,000.00 X 15% = $15,000.00. Now, if in addition to that you had also collected one point from your generous broker on this $100,000.00 note, or $1,000.00, you can see where your yield would be greater than 15%, it would be 16% if the loan lasted 1 year. 17% annual yield would be realized by you if the loan was paid off in 6 months.
Yields can be a little less confusing if you learn to think in terms of time. Yields are expressed annually. When I say a note yielded 16%, I mean annually; whether the note was for two years, twenty years, or only one week.
Adding up all your profits (interest, points and late charges received) on a loan and expressing that annually is the key. One way of doing this is simply by dividing what you got by the total days of the loan (to get a per day return) and multiplying that by 365 days to arrive at a yearly return. And lastly, divide that annual dollar return by exactly the principal amount you lent to arrive at the actual annual percent yielded on this particular loan. Much like figuring gas mileage.
(Total profits received) divided by (total days) times (365) divided by (the original investment) will equal your exact percent annual yield on that particular investment.
Let's look only at points for a moment, when accompanying a note bearing 15% interest per annum.
One point on a one year note is equal to one percent and if spread over one year (expressed annually) increases the yield one percent.
(1 point) divided by (l year) = (l%) + (15% interest) = (16%. yield)
One point on a two year note is still equal to one percent of the loan amount but spread over a loan term of two years expressed annually increases the yield by only one half of one percent. Why? We now must divide that point by two (two years) in order to express the same point annually.
(1 point) divided by (2 years) = (.5%) + (15% interest) = (15.5% yield)
One point on a six month note is also still equal to one percent of the loan amount, but now we only have one half of a year loan term to spread it over. So in this case we multiply times two and find that this same loan point now increased the yield by two percent, expressed annually.
(1 point) divided by (.5 year) = (2%) + (15% interest) = (17% yield)
Based on the above examples, the highest yield can be attained by getting the most points possible spread over the shortest loan period possible. I would like to also mention here that you can see why I never object to early payoffs because spreading the points over the shortened loan period can also increase the yield dramatically.
Again we will use the example of a $100,000.00 note paying 15% interest for one year. Had I brokered this note for you I would have charged the borrower a loan fee of say, five points and shared them with you. We'll say I gave you two points, each point being equal to one percent of the principal amount of the loan, or two thousand dollars. This means that there is 15% interest, or $15,000.00, plus two points, or 2%, or $2,000.00, for a total of $17,000.00. This is a one year note, so expressed annually, this note has a yield to you of 17%.
If the same $100,000.00 note paying 15% interest were instead lent for a period of two years and you collected two points, your annual yield would be 16%. Why? Because the note is collecting 15% interest each year for two years, but it only collects the points once and therefore the two points must be divided by the two years then added to the interest rate to arrive at the annual yield. By the same token, had this been a six month note the yield would have been 19%!! You see, two points for six months are the same as four points for one year, just the way two points for two years are the same as one point for one year, we are expressing points annually or determining what they look like, in one year brackets, spread over the term of the loan. POP QUIZ; You have funded a $100,000.00 note paying 15% interest, written for two years and you collected two points. You have calculated your yield as 16%. Nine months into this loan the borrower wins the lottery and pays you off! Now what does your yield look like? Obviously you must recalculate and squeeze those points into a nine month period now rather than spreading them over two years as was the original plan. So, what is your yield? 15% interest collected for nine months plus two points expressed annually brings your yield to 18%!! Expressed annually we have to squeeze two points into three fourths of one year giving them the annual value of three percent.
If you missed this question you will still be able to spend the two points! This brings to mind the subject of a pre-payment penalty. I, personally, do not believe in charging a pre-payment penalty on a note where the investor is going to receive points. As you can see in the above pop quiz, if a borrower pays you off early your yield is increased substantially without having added a pre-payment penalty.
The amount of interest you charge for your money is usually not determined by anything such as prime rate or what the banks are charging. The interest rate on private money, or hard money financing, is really based mostly on supply and demand. If we have an excess of money available on our "funds available" board, we sometimes must offer a lower interest rate and vice versa. Of course, you will have a bottom line figure in mind as to what you want your yield to be. At the time of this writing banks and S&L;'s prime lending rate is about 9% and bank loans are available for 9.5% to 10% for thirty years. Private investors are collecting as much as 11% interest on really good firsts on improved property and 12% to 12.5% on construction loans and seconds. Add in bonus loan points and private investors can yield as much as 13% to 15% on certain notes even in the current market.
Remember this, the most misunderstood item I've found concerning interest is that people forget that interest is always in arrears. When you pay your January 1st house payment, it includes interest from December lst to December 3lst. Interest goes backwards from the date paid. So every time you collect a monthly trust deed loan payment on time, it is interest for the last month preceding the payment. Interest is always paid in arrears, it's not like rent, which is paid in advance.
By now you're probably still wondering why anyone would pay high interest to you and me when bank loans are available at much lower rates. Well, there are a lot of reasons for this. Suppose a borrower just moved into the area and started a new job. The bank would not loan this borrower a dime because he would not be able to produce two or three years income tax returns placing him at his current job. In other words, a borrower must be established in a job for at least two or three years before a bank will loan to him. This same borrower may have a 50% down payment on a new house from the proceeds of the sale of his old house and you would be happy to make him a 50% loan on the new house for the period of time it takes him to get established, as long as the loan met with all the criteria of our 37 tips. He can either borrow the money from you at your rates or wait two or three years until the bank will recognize him as a good risk.
The recently divorced who has not yet established him or herself as a single head of household might also have trouble borrowing from a bank. Suppose this person is trying to sell a home acquired in the divorce settlement. We could confidently loan up to 60% of the value of the home until it sold. The borrower would more than likely be happy to pay you a higher interest rate for the privilege of being able to borrow money and get on with life without having to wait for the sale of the home. (This type of loan is sometimes referred to as a swing loan or bridge loan.)
Time is only the number one reason why people are willing to pay the
higher rate of private money. Many people, especially when it's a construction
loan, are in a hurry. Time is money and when someone wants to get started
on a building project a few percentage points won't scare them away. A
borrower may be able to qualify for a less expensive loan through a conventional
lender but by the time he waits three months or more for the bank to run
it's red tape, he has lost a great deal more in time than the extra $$
that a fast, private loan would have cost him. In fact, our builder/borrowers
could have a house built and sold and be ready to move on to another in
the three month minimum time period it would take the bank to process their
loan! Time is really what we are selling. Time to get started now rather
than four months from now. That as well as 99 other reasons why people
need fast private money will provide you with a steady supply of borrowers
meeting your criteria.
It is indeed possible for individuals to earn much more, 14%, 16%, 20%, and even up to 25% interest on trust deed investments. This is a little known fact, and one that I feel nearly all investors in trust deeds can easily realize. When other factors come into play such as early payoffs, prepaid interest, borrowing on notes and re-lending etc., etc., the sky could be the limit!
Trust deeds offer a wide variety of options to the creative, or aggressive or thrill seeking investor. I've even referred to some extremely creative financing as "kinky" financing.
If you made a loan of $l00,000.00 for one year with the note bearing 13.5% interest and your broker gave you one additional loan point (one point is equal to one percent of the loan amount) you would receive 13.5% interest on the face amount of the note, or $13,500.00, and 1 loan point, or $l,000.00 for a total of $14,500.00. You can easily see how that deal would net you 14.5% interest if the person borrowed the money and paid you back exactly on time at the end of one year. But that's usually never the case!
I have found that a large percentage of my loans are paid off early. If you're not a mathematician, you can still visualize this theoretically: Say you received as a gift from your broker one origination bonus loan point based on a loan term of one year and a borrower pays off the loan at the end of only six months, you would then be able to come back to your broker with your money to reinvest all over again in a new loan, right? Your broker could put you in a new loan at 13.5% interest and you would probably, just like before, again receive another origination loan point up front, thus, not only netting 13.5% interest for the year on the face amount of the notes, but you also received two bonus points, adding up to a total annual yield of 15.5%. This could go on and on compounded in other various ways. For instance, if you had deposited your payments received in an interest bearing account all year, 16% would have been netted; interest on interest!
I've even known people who have borrowed money against their notes at a lower rate than what they were collecting and then relent that money raising the 16% yield to 20% or more. While it can be very difficult to borrow money against notes, if you are lucky enough to find and eventually develop your own source for loans against trust deeds, it can double or even triple yields to you.
Imagine, theoretically, lending your original money out at 14.5% interest and borrowing most of it back secured only by those same trust deeds at 10% or 11%, and then reloaning that money out again at 14.5% interest! You would be picking up 14.5% interest on the original notes, and then another 4% interest on the note hypothecations, reloaning the very same dollars. At this point you might be realizing as much as 18.5% returns, borrow on the latest well secured trust deeds and on and on and you can see how the sky could be the limit.
I do not suggest you go out and try this tomorrow. I only brought up note hypothecations (borrowing against paper) as an extreme example of creativity to stretch your brain a little. It could be a very dangerous practice if multiple late paying borrowers start kicking your dominoes over, or you didn't intelligently lay out or stagger your due dates so that they owe you before you owe them.
Instead of owning their home free and clear, I've known investors who will borrow against their home tax free (as loan proceeds are not usually considered taxable income and the interest charged is usually tax deductible) at a low fixed interest rate and then loan that money out at a higher rate. They could bring in 5% or 10% clear net profit annually. Obviously, the risk in this strategy is that these investors have to continue making their loan payments on the money they borrowed against their home even if their borrower is late.
It is possible to obtain yields of 20% and more and it's not as uncommon as one might think. For example, any investor with a California real estate brokers license is exempt from usury on most real estate secured loans in excess of $20,000.00 in the state of California. This licensed real estate investor/broker could charge just about anything that the market will bear.
Suppose you had $500,000.00 to invest, and you loaned it out at 10%
interest on several different loans, you could earn a minimum of $50,000
a year without touching the principal. But, picture if you did that and
at the same time you had a real estate license. Now with the ability to
charge loan points on your money, you could easily yield 20%, 25% or even
30% interest. The possibility of an additional $75,000 a year to you, in
my opinion, might motivate you to attend any real estate school for as
long as it took you to receive a real estate license. Those of you already
licensed may not have realized that you already have the ability to earn
double yields! By handling your own loans, you could net $125,000.00 a
year brokering your own money as opposed to netting only $50,000.00 a year
having someone else do it for you, which isn't too bad.
I knew of a man who went out and bought discounted notes and deeds of trust and then immediately resold them. He had sometimes $30,000.00 to $50,000.00 tied up for as little as five to ten days and sometimes he would make as much as $4,000.00 to $5,000.00 profit on turning a single trust deed. If you do the math necessary to express his yield annually, you will find that he earned over 100% interest on his money on some of those deals.
It's my opinion that buying discounted notes and deeds of trust is just too difficult for the beginning investor. Instead, concentrate your energies on funding brand new, fresh, notes and trust deeds.
Example: I lend your friend $10,000.00 from my pension plan because he's in a hurry and can't wait for the bank. He's willing to pay me 15% interest because I am willing to make him the loan in second position, allowing him to leave his low interest, fixed rate first loan in place. The first is so small that this second loan offers me the same amount of equity and collateral that any normal 60% LTV first trust deed would. Because I'm licensed I can charge him 3 or 4 loan origination points for this 6 month loan (multiply the points by two to find out how they increase the annual yield). We are at this point talking about a 23% yield. Through net funding the loan and reinvesting the interest payments this could easily be stretched to 24% or 25% before even considering the effects of an early payoff. If the loan was paid off early, for example at the end of three months, the yield would easily exceed 30%.
There are many, many other aggressive ways to increase yields, pre payment
penalties (which we don't currently use), pre-paid interest, and more.
You can increase your yield by being in a position to lend money with no
monthly payments, where all the interest is due in one lump sum at the
end with the balloon payment of principal; this alone can commonly command
an additional percent or two of interest just simply because of the convenience.
This practice would not be popular with an investor depending on monthly
payments for living expenses.
We have never found it necessary to charge prepayment penalties yet as the yields are usually good enough without them. Also, I have found that advertising no prepayment penalties generates many more borrowers and a larger selection of loans. It puts you a step or two ahead of your competition.
With or without a real estate license one can aggressively pursue even higher yields. You will eventually find the methods that work best for you.
If you would like to see the effects of accelerated yields compounded annually over a number of years, it's easy to do, and fun. Using a calculator, insert the expected annual yield, we'll use 25%, plus 100% (because you'll always get your original investment back), in otherwords 125% or 1.25, now multiply that times whatever the original investment figure is, for example $100,000.00. The first time you push the "equals" button, you should get $125,000.00 which is what you really would have at the end of the first year.
- 1.25 times or 125% of $100,000.00 = $125,000.00.
Each time you push the "equals" button on the calculator it will reveal what the investment will grow to compounded annually. Push the "equals" button 5 times and reveal what a one time investment of $100,000.00 will grow to at 25% simple interest, compounded annually, in five years! Pushing the "equals" button ten times will reveal the ten year total. Push the "equals" button twenty times to see what $100,000.00 will grow to in twenty years. (The one time $100K investment will grow to more than 8.5 million dollars in 20 years!)
Each time you push the "equals" button, it does the same function for you once again. As long as you put the 100% plus the interest rate in first of all, multiplied by the one time investment amount, the calculator will compute your total principal and simple interest compounded annually automatically each time you press the "equals" button!
If plotted on a graph, compounded yields keep increasingly approaching a vertical path. The line on the graph starts it's climb ever so slightly and then gets steeper and steeper at a more and more rapid rate. What I'm trying to say is that it would seem logical that if $100,000.00 at 12.5% compounded annually for 20 years becomes slightly over one million dollars, then it would also seem logical that the same amount of money over that same period of time at exactly double the interest rate, would become exactly twice as much (or over two million dollars). Right?? Wrong!! It becomes closer to 9 times as much because of the dramatic effects of accelerated yields compounding annually. I can't explain why, I can only tell you that it is true that a one time investment of $100,000.00 at 25% simple interest compounded annually becomes $8,673,615.10!!! This is a mathematical phenomena! Now, get out your calculator and have fun!!
I recall one example of a loan I made a year ago to a builder and a few months later he wanted to pay it back. I said, "Why don't you keep it?" I told him for a fee I would roll the note over to another property he was in the process of purchasing. Now, you would not want to roll it onto a worthless property; you'd want to be certain that you rolled it only onto a property that passed all of the usual safety check points.
Without the builder having to come up with the money to pay me off, he netted more cash money at the close of that particular escrow. Instead of him having to pay me in dollars, he was able to pay me in paper, i.e. with an IOU on another property.
It usually isn't good practice to roll money for people on a continuous basis if they don't have the ability to repay the loan as it will snowball and get them into trouble, this is known as the loan cycle. This builder was a little bit different than the borrowers dangerously caught in a loan cycle because this particular borrower had a plan and made it attractive to me. My original investment grew to more than four times itself in a year because the client moved it from one property to another property and I charged him points each time. I was glad I was able to help finance some of the forty homes he built and sold. He made himself an approximate 1.2 million dollar profit and I was happy too!
This particular borrower built 30 of those homes in only a two-year period and made himself well over a million dollars when the market here in California was still booming in 1989. He made a tremendous amount of money starting with no money of his own, so you can see how I didn't mind making a 400% profit on a small amount of my money in a one year period. It's easy to see that investors can expect to earn far more if they get involved.
We saw how $100,000.00 "ninety timesed" itself over a 20 year period. I don't know of any mutual fund, stock, or savings account that offers this. Your stockbroker certainly will not tell you this and I can guarantee you your banker will not tell you about these compounded yields because what this does is bypass them. You can eliminate the middlemen so most of the profits can go directly to you.
Let's take another example. Suppose you have a child and you want him to go to college. You know that you will not have $75,000.00 or more it will take to send him to college fifteen years from now but you can come up with $10,000.00 now and put it away. You go for a more aggressive plan of second trust deeds with higher yields. If you stay far enough ahead of inflation you should have enough to send him to college. ($10,000 invested at 11% interest compounded annually for 15 years will return $80,623.10.)
I knew one person who had $100,000.00 worth of credit on his credit cards. I don't recommend doing this, but I'm fascinated with the extremes of creativity some very aggressive people will go to. He borrowed an incredible amount of money at 18% interest on his credit cards and put the money out at yields of 25% to 35% interest on some aggressive, but very well secured third notes and deeds of trust. He made astronomical profits on the money.
Next to owning real estate, lending against it is the best investment I know of.
Maybe, you have a technique or twist to higher yields. Let me know as
I'm always interested in creative proven new ideas that work.
WHAT THE HECK IS SUBORDINATION?
"To subordinate or not to subordinate, that is the question!"
As defined by Webster's New World Dictionary, Second College Edition
(to) Subordinate, adj.: l. inferior to or placed below another in rank, power, importance, etc.; secondary 2. under the power or authority of another.
As defined by Brad Evans, 24 yrs. full time as a broker in the school of hard knocks.
(to) Subordinate, verb: 1. to finance shortages of up front cash needed
by a buyer or borrower and finance it with your (the sellers) real estate
equity. 2. to have your equity dollars take a back seat to, or voluntarily
accept a junior position to a new loan being originated for another. Subordination,
1. a double sided blade or potentially dangerous tool more and more commonly
being misused these days by a few buyers or builders to finance their shortages
of up front cash in a transaction and finance it with your equity dollars
usually in order to buy or build a home with less cash. 2. a misunderstood
vehicle being more and more misused by equity skimmers and scam artists
to bilk gullible or less knowledgeable people out of their real estate
equity before skipping town. 3. a wonderful tool that if respected, understood
and used properly, can be of great benefit to buyers, sellers, realtors
and contractors alike!
Oftentimes a seller of a piece of property will be asked to "subordinate" as a condition of a prospective offer to purchase. The seller has to then try to intelligently weigh the pros against the cons, pluses against minuses, and assess the risks connected with that proposed request for him to subordinate all or part of his equity. A seller must first understand what subordination means and how it will affect him and exactly what the risk consists of after closing and in the future. Only then, with a good understanding of the potential risks, can he or she decide if those risks are worth taking in order to meet a buyers request.
If you have been asked to subordinate and if you are fully aware of (understand) the risks and facts and you still are not comfortable, then you could ask the borrower for sufficient additional cash resulting in a reduction of the amount you have been asked to subordinate. Also, one could require sufficient additional real estate collateral (instead of cash) to further protect remaining interests being subordinated.
Oftentimes a buyer without a lot of money to put down on a property
will be willing to pay more for a particular piece of property where the
seller will agree to offer subordination because it will enable him to
offer the construction lender first position without having to pay cash
for the land he wishes to build on. A knowledgeable buyer might be attracted
to a property where a seller would agree to subordinate his equity to that
buyers construction lender. A seller who agrees to subordinate his equity
would In effect be giving that buyer the sellers equity to use as collateral
for obtaining construction financing.
The request for the use of subordination isn't always restricted to the sale of vacant land or new home building however, and does occur within many types of real estate transactions. Any type of equity position can be subordinated. For example, a motivated seller could allow property that he owns free and clear to be pledged as collateral for a construction loan to a buyer's lender. The seller carries his equity as a second at close of escrow behind the buyers new construction first loan because the buyer's construction lender requires a first position for his new construction loan that will also be placed on the property. I've even seen a bank agree to subordinate a one million dollar first loan to eleven privately funded new first position construction loans brokered by me.
Not to dwell on the topic too much longer but suppose for example I
sold you a one acre parcel of land for $50,000.00 with nothing down and
carried a $50,000.00 first trust deed loan for you. You probably wouldn't
be able to obtain a construction loan very easily in second position especially
when having no equity in the property. Now, if you could have convinced
me to subordinate my $50,000 first loan, you would then be free to offer
any construction lender first position. Subordinating my interest (to second
position) would allow you and your lender to use my valuable land equity
as though it were your own. But watch out! Assuming for a moment that I
did agree to subordinate my land equity for your new construction lender
in the amount of $50,000.00 what do we have? ¡v?*¿!! A $50,000.00
lot with a $50,000.00 first construction loan and a $50,000.00 second land
loan on it. This obviously would be the time to require additional cash
and or real estate collateral to protect my interests from winding up being
secured by blue sky! With sufficient additional cash and or real estate
collateral my situation could have been well enough secured and you, the
buyer, equally happy as you put your deal together with a lot less cash
than usual, possibly no cash and 100% financing. All is well if I require
enough additional collateral. For example you gave me a first on another
home you own outright worth $100K. I'm protected and you got 100% financing,
didn't you? 100% financing is neither illegal or immoral. After all, every
veteran in the U.S. is eligible for a no down 100% V.A. loan if he can
qualify because the government guarantees repayment of V.A. loans to the
lenders that fund them (like another form of the above additional collateral).
What if I decide to sell to you as described above and subordinate for you, but instead you take the construction loan proceeds and instead of improving the property (by building a nice home there, greatly increasing my collateral to more than cover both loans), you skip town? Now I've got nothing because I gave my equity position to you to give to your lender. One year after escrow closes what if then subsequently the construction lender in first position has to foreclose and take back the lot (I could have taken the lot back, but what good is a $50,000 lot with a $50,000 construction loan on it, before or ahead of mine?) When would subordination ever be good for anyone? Well, believe it or not, as much as one out of every two or three loans I've brokered in the private construction lending business on average will entail some amount of subordination on the sellers part. If misused, subordination can be a lethal mistake for a seller. With knowledgeable buyers and sellers and sufficient cash and or additional collateral to protect a subordinator however, it can oftentimes be a wonderful tool, like a piece of rope or a double edged sword.
It is very important to see to it that the loan funds from the construction
loan will be used to improve the property. If there is even the slightest
chance that they might not, then anyone subordinating had better adjust
the cash and or additional collateral he requires upward as if the borrower
had no construction loan and never will improve the property from his equity
standpoint. Just suppose for a moment that you could be guaranteed through
the use of a voucher system or a reliable draw system that the borrower
will (must) improve the property. In that case you may want to give some
consideration to a portion of the future proposed improvements. As well
as asking for additional cash and or additional real estate collateral
to protect his interest a subordinator should require the borrower be on
a voucher system or a draw system that says that the buyer has to use each
draw release to improve the property at each stage or the balance of all
construction money will be applied back to his loan as a principal payment
and taken away from him. If that can be obtained then a subordinator should
not count on any future improvement to the property as a part of the security
for his interest subordinated. If a subordinator has required sufficient
cash and or additional collateral, and has verified that a voucher or draw
system will be in place he is still not done. At this point if I were agreeing
to subordinate I would look very close at the loan I am going to be "subordinating
to". When is it due? Does it have a balloon? What's the interest rate and
monthly payment amount? Will a potential rental income cover the debt service
should, after all this, I still be forced to foreclose to protect my interest
and take over the responsibility of the new construction loan myself? If
the construction loan has a balloon payment is it so big that I could never
begin to handle it financially if I had to take the property back? And,
if I have to take this project back when it's only half done, can I phone
up some subcontractors to finish the job, and will the balance of the construction
funds be adequate to finish? The agreement to subordinate could be made
with a condition giving me the right to approve or even set limits on the
loan amount, interest rate, and terms of that new loan I am to be taking
a back seat to.
ONE LAST POINT
Banks spend a lot of time checking borrowers assets, incomes, savings
account balances, car loans, verifications and loads of other not so relevant
information when you consider that if a borrower tomorrow turns to the
bottle, gets cancer, goes broke, loses his job and falls behind, none of
that above stated information will matter more than the remaining real
estate equity securing the loan. In a foreclosure situation as the lender
you don't get his spouse's income, his car, sailboat, savings account,
or anything else but the property. So, in my opinion, if you ever plan
to be a lender or a subordinator it would make good sense to educate yourself
as much as you can about the collateral. If the collateral offered in any
real estate transaction isn't sufficient to protect ones interests, one
should require sufficient additional collateral or simply refuse the offer.
1.Is agreeing to subordinate (as the seller of real estate) always a risky, dangerous or bad thing to do?
3.If I agree to sell my Real Estate to you today for 50 percent down and at the same time, I agree to carry the balance of the purchase price on the note and deed of trust and subordinate to a new 50 percent first for you, how much would your down payment be?
8.If someone subordinates away their real estate equity interests blindly, what could happen?
Answers to pop quiz questions:
"WELCOME TO MONEY MATTERS"
(Transcription of live interview video hosted by Russ Powell, former CBS television news anchor.)
Welcome to Money Matters. I'm Russ Powell. In our previous interview we examined trust deeds as a means of investing safely for high yield. Today's topic is Subordination. The dictionary definition of subordination is "to make subordinate, assign to a lower order or rank, hence to be of less importance." In real estate we have a tool which is called a subordination clause, a clause in a second or junior lien permitting retention of priority for prior items, and that's a pretty complicated phrase. Once again we are calling on our resident expert, Mr. Brad Evans, to discuss subordination as it applies to real estate. Welcome aboard again, Mr. Evans.
Thank you, Russ, I am real glad to be here.
Q: Can you break down for us in laymen's language just exactly what is a subordination clause?
A: Sure, subordination can take place anytime a person has any equity in a piece of real estate or any equity in a note secured by real estate, anytime they allow that equity to be used by another individual, reducing their rank, basically, climbing out of the front seat of a car into the back seat of a car, and giving another lender, like a construction lender, the front seat position--that is really what subordination is.
T: It benefits the seller: he is going to make more interest. It benefits the seller: he is going to sell his property. It benefits the buyer because he is going to develop the piece of property. It benefits the buyer of that new piece of property because they now have a new home and everybody wins in that situation. It is basically leverage financing like you read about when one corporation buys out another or when employees of a corporation buy out the stock of a corporation, that is all leverage too, that's a form of subordination.
Q: What are the circumstances which would bring subordination about? Is it brought about by the buyer or the seller? Or can it be brought about by both?
A: Subordination is most commonly used when people want to purchase a piece of property and maybe build a home there and they don't have the cash or the assets to pay cash for the land and pay cash for the improvements, the buyer would, through the use of subordination, be able to use the seller's equity in the land to attract a construction lender.
Q: Then what would be the motivation for the seller to enter into this kind of arrangement?
A: If subordination is done properly it can enable a seller many times to attract a buyer for his lot much sooner than possibly a seller who was asking for all cash would be able to.
T: Today in the real estate business you really need to know about all different types of financing. To be competitive, much less even to survive, you really need to be well versed in all types of financing. I know that over the past 14 years there has been many occasions when private investors and private financing has come into play to put together construction packages, acquisition of lots, all types of different avenues have been made possible through the use of private investors and private money.
Q: What about the advantages for the buyer? What are the advantages for him, other than getting the use of that equity? Is there any other advantage? Another factor involved, are there monetary limits in how this can be accomplished?
A: Subordination can be a wonderful tool for a buyer of real estate because they are able to, in effect, use that seller's collateral and they are able to buy a property or build a property with less money down, less money out of their own pocket. In some cases, no money.
Q: What are some of the things that both the buyer and the seller would be looking at before they decided to take this kind of action?
A: Subordination is a double edged sword, Russ. It is something that if used properly it can be a magnificent tool for both buyers and sellers of property, but if it is used improperly, the results can be devastating for both parties.
Q: What are the specific dangers that the buyer might encounter with this type of transaction?
A: Probably the worse danger involved in subordination is over financing. A buyer may, through subordination, be able to obtain a piece of property and build a home for little or no money out of his pocket and if that buyer is in a position to make the monthly payments on the loans, that's fine. But subordination could, in effect, enable the buyer to bite off more than he can chew.
Q: What would that entail? How would he be aware of that fact going into the transaction, or would it be just an accident, or circumstances that would prevail later on that maybe he ran short of funds or something like that. What are the circumstances involved?
A: In my opinion, it would be really up to a seller to check as to whether or not the buyer had the ability to make the monthly payments or handle the monthly payments on the land and the construction loan.
Q: Is there a formula for that they would be engaged in?
A: A common formula is three to one. In other words, adding up the payments on the land and the construction loan and then multiplying that by three. The buyer should show that he can make at least that much money per month and has the ability to make the payments. Otherwise, then the seller will be in a position where he will have to take the property back and start making payments on that construction loan, and we wouldn't want that to happen.
T: I was offered full price if I would accept a subordination agreement. On the loan that I carried I received an above market interest rate and I gained certain tax advantages by subordinating rather than taking a full price sale. I should have been paid on the loan I carried six months ago. The purchaser is now bankrupt. He is in a bankruptcy proceeding and the bankruptcy court informs me that I am now an involuntary investor with this bankrupt individual, I'm not receiving my interest and the principal payment has been prolonged indefinitely. It is a very untenable situation financially. You are simply in limbo for the period of the bankruptcy proceedings.
Q: It would seem to me from what you have said so far that the man really at risk in this kind of transaction, the one who bears the most risk, is the seller. What specifically does he stand to lose in the event this thing goes sour?
A: If the seller agrees to subordinate in order to get his property sold and in effect he agrees to get out of the front seat basically and climb into the back seat and let the construction lender or whoever he is subordinating to have his front seat position. You can see, for example, that is the proceeds from that loan that he subordinated to were misused, if the buyer got the seller to subordinate through a loan on there and took the money and ran or took the money and bought candy bars with it or paid off his bills or took a wonderful trip to the Bahamas, then the seller would have this large note ahead of him that he had subordinated to, and suddenly there would be nothing to show for that--no new home on the property--and the results could be devastating. Also, that seller who climbed into the back seat would then have to make payments on that large loan that was ahead of him that he had nothing to show for. Basically, all of his equity could be gone in that property if he subordinates and isn't assured or doesn't take the steps necessary to make sure that money is used for what it is suppose to be used for.
T: Would I recommend subordination? I would, under the following set of circumstances. One: if the purchaser of the property is putting a minimum of half down on that property. Two: if the purchaser of that property is going to owner-occupy it as opposed to a speculation project. Three: if I am in a financial position to easily pay off any loans that are underneath me. Only under those circumstances would I subordinate.
Q: Isn't there some provision available whereby the seller could make sure that the money that is given for this specific purpose is used for that specific purpose?
A: There is many different ways. We wouldn't have time here to go into them. But, for example, if the seller of a lot subordinates to a construction loan that is being handled through a bank, for example, and the construction loan proceeds were doled out on draws as work progressed, then that seller who had climbed in the back seat would be assured that money would go out into the improvement of the property, and it wouldn't in any way be able to go out to the buyer's pocketbook or, you know, for some other reason or go out for the wrong thing.
Q: Are you saying then that under that set of guidelines, for example, that the money would be released periodically, like when the foundation was poured and then when the framing was done- that sort of thing?
A: Exactly, a draw system of some sort or a voucher system of some sort, so that seller who subordinates and climbs into the back seat can be assured, guaranteed without a doubt that money will be put into the project or it won't be put out at all.
Q: We've pretty well established that the seller is the one who is most at risk in this type of transaction. What are the basic things he should do to make sure that his investment is not going to go awry?
A: If the seller is asked to subordinate, probably the first thing the seller would want to do is to establish that the buyer had the ability to make the payments on the loan that the seller is asked to subordinate to, first of all. And secondly that the proceeds from the loan, that the seller is asked to subordinate to, will in fact be used to improve that property and will not be used for the buyer's personal benefit or to pay his bills off or to go into some other property.
Q: There is a way to make that possible by drafts that come out at a certain time for basic things that are done in the construction. Is that right?
A: Yes. If a person subordinates to a bank construction loan they can generally be assured the bank will dole the funds out either in draws as work progresses or in vouchers, but it would still be very important for that seller subordinating to check and see how the money is going to be handled, how it is going to be doled out, so that he could be assured that there is a draw system or a voucher system of some sort.
Q: There are obvious advantages for the buyer in this type of an arrangement. Basically, what are the advantages that accrue to the seller?
A: There is a tremendous advantage for the seller if subordination is used properly because he can attract many more buyers for his property, first of all, because it takes less money for them to get in, get started and build a home there. Also, he can ask for things like a higher interest rate in exchange for subordinating. Also, a seller could ask for maybe a large cash principal paydown on the loan in exchange for subordinating, and lastly, he could ask for a higher price, higher sales price, on his lot in exchange for subordination.
Q: What would be the motivation for a buyer to get into a subordination process when he may have to pay a higher interest rate and more money down? Why wouldn't he instead go to a commercial bank or savings and loan?
A: Picture yourself wanting to build a property, build a home. Picture yourself right now having the need to move or the need to build a new home or the desire to build a new home and you don't have enough cash right now, and you're faced with the choice of either finding a seller who will subordinate because you don't have the cash to pay cash for the land and pay cash for the construction, and so it would boil down to a choice of either you could do it now with subordination or you would have to wait until maybe some later date when you accumulated the money. Given that choice, there are plenty of people now who would hunt for subordination and want to build a home now with little cash rather than have to wait the years necessary to save up the cash to pay for the lot or the home.
T: Another valuable aspect of private money is the time frame involved. I know that we have had deals and transactions over the years that required a very quick turnaround and less or more conventional money has always taken a lot longer through the appraisal process, through the pages and pages of paperwork involved. I think that has certainly allowed me over the years to pull together many transactions in a much more timely fashion than if I had not used private money.
Q: You're saying that I have bought a piece of property and I am making monthly payments on it and this would be an expedient way for me to get into the construction of a home?
A: Exactly. If you could convince the seller of this property that you
own, which you are making payments on, to subordinate, then suddenly you
could go out just as though you had paid cash for that land and offer a
construction lender a first deed of trust on the property and start building
next month, maybe.
Q: Are there any other risks for the seller?
A: Yes, Russ, there are many risks for the seller. I am not a lawyer. I can't give out legal advice and advise you whether to subordinate or not to subordinate. That's why I wrote a book called "Safe Trust Deed Investing." If you want to read the chapter on subordination, it will give you some pointers on what to look for. Another common error that happens in subordination that can also be devastating, is where you the seller subordinate to this new first trust deed and the new first trust deed is maybe due, has a due date sooner than your loan does, and if the buyer takes off and doesn't make payments on it, then you are not only faced with making payments on the large first that you subordinated to, but you could possibly be faced with paying it off in full on the due date, which could be devastating. It could result in total loss of your second deed of trust through foreclosure because you didn't have the ability to pay that first loan off.
Q: Is there any way to guarantee against that?
A: There sure is. In my book, "Safe Trust Deed Investing," there is a checklist. I can't remember exactly which rule it is, but there is a rule in there that says: "Make certain that the first trust deed or whatever note or deed of trust you subordinate to, whenever you do, has a due date that is at least six months or a year, preferably longer, than the due date of your loan."
Q: Then I would assume that anyone contemplating, the seller in this case, getting into this type of arrangement should seek out someone if he doesn't have the knowledge himself, to seek out someone who does have the knowledge about these transactions to make sure he is on the right track.
A: Exactly. If you ask around, contact your local real estate professional. If he is a professional, he can give you advice about subordination, the pros and cons. Consult your attorney. Subordination has been given a bad name or stigma only because it has been misused. Subordination is a very valuable tool for the buyer as well as the seller of a piece of property and can be risk free if done properly.
T: The house I am standing in front of right now, we managed to buy from a seller. It was a difficult piece of property. It was a fixer upper, and he agreed to subordinate 50%, so we got a 50% mortgage on it and the seller subordinated 50%. We kept it for about eight or nine months. We fixed it up, did a lot of painting, a lot of cosmetics, a lot of work on the outside, and then we managed to get our loan from another lender which paid off the seller. So, not only did he sell his property that was up for sale for two years, but he got paid off in whole within a period of less than a year, so this was very beneficial to both seller and buyer.
Q: You have pretty well outlined the pitfalls that faces the seller, and there are many of them: the idea of loaning more than you should and the idea of the buyer hitting the trail and leaving you holding the bag--are there any other specific things you can think of that the seller should be aware of?
A: There are several, Russ. We have pointed them out in our book, "Safe Trust Deed Investing." For example, fire insurance. Picture yourself having climbed out of the front seat of the car and into the back seat and given this construction lender a first deed of trust on your property, and the due date is right, you've checked that, and the money is going to be doled out in draws. Generally, the construction lender will require fire insurance. There could possibly be a private loan and they didn't require it. You had better require fire insurance for enough to cover that first and your loan in the event the property burns to the ground.
Q: Does a property owner have to own his property free and clear before he can subordinate?
A: No, not at all. Subordination can take place any time a person has an equity in real estate or in a note secured by real estate. It doesn't have to be in first position. A person in third position could subordinate to a new third putting their loan in fourth position. Whether they would want to or not, and whether or not the criteria has been met to make it be a safe subordination, that would be for them to investigate, but you don't have to own a property free and clear to subordinate.
Q: When you talk about third and fourth positions, it would appear to the layman, such as myself, that that is extremely not only complicated, but a lot more risky.
A: Not at all. People are very confused by the number of the note. They think that if a first is a first then it is more secured than a second. That is not true. What makes a note well secured is the amount of equity in the property, the amount of collateral securing the note, not the number of the note. Let me give you an example. If I had a house next door to your house and both of our homes were worth $100,000 a piece, and I had a first on mine for $110,000, that wouldn't be a very good first, would it? In the same way, if you had a first of a thousand dollars on your house and a second of a thousand dollars on your house and a third of a thousand dollars on your house, that third, if you look at the figures on a piece of paper, is backed up by $98,000 in collateral. That's a great loan.
Q: What makes a first trustee the first and a second trustee a second?
A: That's a very important question. What makes a first a first and what makes a second a second is really nothing more than the date and the time that each of the documents was recorded.
Q: In the process of them redeeming all of this, we would begin with the fourth, then the third, then the second, then the first. Is that the process?
A: I said that a second or a third or a junior lien could be more secured than a first lien. I didn't say that it would require less work. You would have to keep tabs on any of the loans ahead of you. Anytime you subordinate you would also want to keep tabs on any of those loans in the same way that you subordinated to. A request for notice of default is a very simple document that will allow you as the junior lien holder who subordinated to be notified anytime that first loan becomes in arrears.
Q: I can't help but feel during this discussion, if one of those areas where there is a lack of expertise could result in some burned fingers very swiftly.
A: That's true. That's why we wrote a book called "Safe Trust Deed Investing" and that's why we have a chapter on subordination.
Q: One of the prerequisites for the seller in this kind of a situation would be if you are going to do this you should have the wherewithal to take over whatever might go foul so that your resources are not depleted. In other words, you should have enough in the bank or enough equity or enough resources so that you don't go down the tubes if this thing turns belly up.
A: Exactly. You should be aware of exactly what you are subordinating to and be in a position to handle it. Don't go into subordination blindly or you may find the money used for something else and you may have to take back a vacant lot with a very large loan on it.
Q: You mean to tell me that a buyer could go out and finance 100% of the cost of a house and the land, if that's possible, with no money?
A: That's right. It happens all the time. Whether or not it happens successfully or devastatingly is really dependent upon that seller who subordinates, but people financing 100% of their costs goes on every day. For example, a veteran going out to get a home loan, the government will back him up on a 100% loan, so there is certainly nothing illegal about no-down financing. It is a double-sided sword, as I mentioned to you before, that can be used very effectively if used properly.
T: I think subordination in the basics of subordination or some form of subordination is an excellent tool if it is used to make sure both parties win and comes to fruition so that they all gain and move ahead. I think it is a way you can put deals together or transactions that normally could not be put together that benefits all parties.
Q: Well, it appears to me that subordination is only one word but has many, many meanings for many different people. Again, coming back to what you said earlier, I think that probably the wisest advice that anyone could give or take in a situation like this, again, would be to go to people who have the expertise and have the knowledge to make these things work properly so that nobody gets burned, so that nobody gets hurt, and it can be done if they get the expertise.
A: That's right, but going to them itself isn't going to do it, isn't
going to be enough. You are going to have to go to the people with the
expertise and you are going to have to know what the right questions are
to ask. You are going to have to get the right information to the right
questions, and only then can you decide intelligently whether to subordinate
or not to subordinate. To help you achieve this, in my book, "Safe Trust
Deeds Investing," I have a 37 point safety checklist that you can consult
so that when you are trying to decide whether to subordinate or not to
subordinate that you can ask all the right questions.
FORECLOSURE & BANKRUPTCY
When a borrower does not abide by the terms of his note, he is in default. The most common default is that of non-payment of monthly loan payments, fire insurance premiums, taxes or even the balloon payment, when due. I advise my investors to wait until a borrower is two full months behind and both loan payments are past the grace period before taking action. At that time a lender must take his original doc's and go to the title company (Trustee) and have the foreclosure department file a notice of default. Your broker should be more than happy to help handle this for you if you want him to.
The title company's foreclosure department will fill out the Notice of Default and record it against the delinquent borrower. The title company charges a fee for doing this and that fee is added to the balance owed by the borrower at the time of filing, along with back payments and late charges. The investor will probably have to advance some of the costs which he will get back when the default is cured.
The notice of default notifies the borrower that he is in default on his loan and that he has a certain number of days to bring the note current. It further details that should he fail to do this they will publish a foreclosure sale notice in the newspaper and sell his property on their front steps, or the courthouse steps, using the proceeds to pay his debts against that property. In California, the trustee first records the NOD, next there is a 90 day waiting period after which the trustee publishes the required notice regarding the sale date and particulars for a period of 20 business days before the property can actually go to sale.
In California, up until the last five business days prior to the actual sale the borrower is allowed to cure the default by bringing the back payments and fees on the note current, that is paying what he owes to date. But once into the final five days prior to the sale he no longer has that privilege, he is then required to pay the entire principal balance in full, as well as all past due interest and late fees, and all foreclosure fees.
This entire foreclosure process can take 3 to 6 months (and sometimes even longer) and can be a headache. But the interest clock is always running and eventually you will be paid for all fees etc., or you'll get the property, and those are the only two alternatives that exist.
Ninety nine percent of the time the delinquent borrower will bring his note current at the threat of a notice of default because of the additional cost to him of the title company fees (which, at the time of this writing can exceed $500.00 or $1,000.00 or more). At the very least, if a borrower has to pay these fees once to save his property his eyes open and his attitude changes and he usually learns to be more diligent with his payments in the future.
There are also exceptions to the rule. A borrower may find himself in foreclosure due to some circumstance beyond his control and honestly need only a little more time to get current. He may have some unforeseen delay in repaying the loan and need a very short extension, in which case I urge my investors to be reasonable and grant a few days extension.
If you have to foreclose, the position of your note will be what determines how you are affected. The following are examples of some common situations. If you've followed the rules outlined in my 37 tips, you might stand to make a very large profit.
If your note is in first position and is the only note on the property the basic procedure at the end of the three to six month foreclosure process period is as follows. On the day of the sale you and your trustee will go to the courthouse steps and after your opening bid for the amount of your note plus all back payments and late fees and title company fees due, etc., and providing others wanting the property do show up to bid, you have two choices. 1. You can allow the property to go to the next highest bidder, in which case you will be paid in full what is due you out of the proceeds right away. OR if you really want the property you can . ., 2. Elect to try to get the property by making another bid higher than any of the other bids on the property. The bidding will always start with you or the person owed the money on the home in foreclosure for the amount that is owed plus all the other fees, etc. to the title company. All bidders must physically produce, for the officer in charge of the sale, proof of bona fide approved funds acceptable to the trustee on hand for the bidding before the bidding begins.
Junior lienholders waiting until less than 5 days prior to the sale to cure senior loans ahead of them could be forced to pay off senior loans in full instead of simply curing or reinstating them with back payments, etc. So you have a second and you bring the first current and go to sale on your second, it all works the same except that you or anyone getting the property gets it with the "in tact" current first on it. Also, any loans or liens of record, behind or junior or to the one holding the sale, are wiped off . . . gone and wiped out.
In this next example there is a first and a second and the second is the only note in default. The owner of the second note and deed of trust will need to assume responsibility for the first if he chooses to buy the property at the foreclosure sale. EXAMPLE: The property is valued at $100,000.00. The first is $40,000.00 and the second in default is $20,000.00. Bidding will start at $20,000.00 plus all fees and back payments. The property is being sold with the current first left in place. Lets say $25,000.00 total is what the second holder opens the bid for. You want the property so you bid $25,001.00 and the second holder drops out. You've got it and your $25,001.00 pays the second holder in full. All other loans and liens behind that second are wiped out and you get the $100,000.00 property for $65,001.00, your bid of $25,001.00 plus the $40,000.00 first on the house in good standing.
Occasionally, when a borrower is faced with a foreclosure, he goes to
a lawyer. The lawyer may recommend the borrower negotiate for an extension
and if all else fails he can file a bankruptcy and temporarily stop the
impending sale. In reading the most recent trustees association newsletter,
I understood it to say bankruptcies will occur approximately once in ever
138 loans, so expect it. It's a part of "Safe Trust Deed Investing" and
will not hurt you if you do what you're supposed to do. Even bankrupt borrowers
facing total loss cannot hurt you financially if you follow the rules.
STOCKS -vs- TRUST DEEDS
So You Think It's Safer to Invest in the Stock Market?
A stock's value fluctuates by the hour, if sometimes not by the minute. A Trust Deed's value is always fixed and stable. If the bottom dropped out of the economy tomorrow, and the stock market closed down and we converted over to prunes, or apples or deutsche marks, people would still need a place to live. Houses would still have a value and still be worth "X" amount (of whatever) per month in rent. Stocks may not be worth a feather.
A stock is collateralized by conglomerate equipment and properties: factories, warehouses, ships, port facilities, headquarters buildings, mills, etc., oftentimes in foreign countries. This can be non real estate items such as goodwill, intangible assets, and even personal property as well, whereas, Trust Deeds are collateralized only by real estate within the United States and most often by homes within the investor's local area. To me, the home is the very building block of our society.
A stock owner is in the third lien position (behind bondholders and
preferred stockholders), whereas, a Trust Deed owner is usually
in the first or second lien position.
A stock owner's security position is shared with thousands of other people (that's why they call it "share"). A Trust Deed owner's security position is shared with no one.
A stock broker charges a fee to every investor, while your Trust
Deed broker usually charges no fee to you. What do you think a stockbroker
would advise you to invest in? Would he profit more from your decision
to invest in stocks or Deeds of Trust, the one that pays him the
most or the one that pays you the most? A Trust Deed broker charges
no fee to his investors, thus, you will not see any stockbrokers out there
peddling advice to invest in notes and Deeds of Trust, they can't afford
A stock can only be bought and sold through brokers. A Trust Deed can be bought and sold through brokers, but it can also be bought and sold through private parties without any stock or brokerage fee.
A stock either pays no dividends, or pays a dividend well below the prime interest rate. A Trust Deed (especially when bought at a discount) pays well over the prime rate. With private money and Safe Trust Deed Investing, we are not adversely affected by to the prime interest rate as, say for example, the stock market can be. Generally, when interest rates fall, I, personally, have seen stocks and bonds be affected. When interest rates climb, the interest rate that you get on your house at the bank also goes up. Private lending through private individuals is regulated only by the supply and demand of money. If there are not a lot of private investors in your home town, you can command much higher yields than if the newspaper's advertising section is loaded with them. (Brad says, "When it's good, it's good, and when things are bad Trust Deeds get even better!").
Also, many stocks don't generate a monthly income, whereas houses and Trust Deeds do. Stocks don't pay monthly interest payments either, as do Trust Deeds....do they!
A stock's dividend payments to you may be legally halted at any time by a vote of the board of directors; a Trust Deeds payments to you can never be legally halted. Even if the person files for bankruptcy, your interest clock is still ticking as you continue accruing interest on your money though you may not receive your payments until the property sells. You can go to the bankruptcy court and ask to have the stay removed, this is called "getting relief from the stay". You can have the bankruptcy court allow you to take that particular property out of the bankruptcy. You may be permitted by the bankruptcy court to go ahead and hold your foreclosure sale as long as there isn't too large of an equity in the property.
If a stock stops paying you, you have no recourse. If a Trust Deed borrower stops paying you, however, you have lots of recourse, including borrowing money against the Trust Deed, filing foreclosure or liquidating the investment by selling the note and Deed of Trust. Believe me, filing notice of default on a delinquent borrower is like a severe bee sting, usually altering the tardy borrower's attitude! If a stock stops going up, you're not in control, you're not in the drivers' seat. In Trust Deed investing, however, you are in the rivers' seat. Remember the Golden Rule: "He who has the gold, makes the rules!", and that will be you on every Trust Deed.
A stock never makes you principal payments, while a Trust Deed will. A Trust Deed makes principal regular principal payments when amortized and also makes a principal payment in the end (a balloon payment is a principal payment in full at the payoff due date). What stock has that? With Trust Deeds, there is always a due date for you to be paid all your money back, plus interest, whereas the stock market has no provision for you to be paid back, "interest" or "anything", ever.
A stock is bought and sold in a market heavily controlled by politicians and un-elected bureaucrats. Existing Deeds of Trust are bought and sold in a free enterprise market regulated only by the supply and demand of money.
I prefer to originating brand new notes and Deeds of Trust with new policies of Title and fire insurance as opposed to dabbling in existing notes and Trust Deeds. I look at a note and T.D. slightly similar to the way I might look at the purchase of a used car. Would you rather have somebody else's headache that they're trying to unload, or would you rather have a brand new car that was just created and is right off the showroom floor with a new car warranty?
More particularly, given a choice, I prefer specializing in new, single family construction financing and originating loans rather than being involved in existing notes and Deeds of Trust as many times, someone is trying to get rid of a problem or headache note.
On the other hand, if I do happen to find an existing note and Deed of Trust that does have a good payment record and does fit all the criteria in my Safety Checklist, then I may get involved in it as long as it meets all the other usual standard safety criteria.
A stock cannot be bought or sold in the early mornings, evenings, weekends and holidays; the market is closed. A Deed of Trust can be bought or sold anytime as the market never closes. I keep a board on the wall in my office and when someone wants to invest money, they will call me anytime, sometimes they will even call me at 8:00 p.m. and leave the information on my answering machine. However, recording the paper work must be done during business hours through the title company and the County recorder's office.
A stock is liquid if the brokers and government regulators permit it. A Trust Deed is liquid (can be bought and sold easily) at any time. Also; we agree to sell any Trust Deed brokered by us for any of our investors, anytime, and charge no fee for that service.
I suppose it is possible that if you bought stock, it could be a stock that was forged, or even a bogus stock of some type, whereas a Deed of Trust can always be purchased with a lenders policy of title insurance, which insures you against forgery, etc.
A stock can never be bought "below market" and sold "above market" for a profit. The regulated market price, by definition, is the price of the stock. A Trust Deed can easily be bought "below market and sold "above market" for a profit. There is no fixed, regulated market price, only supply and demand.
A stock's price is fixed at a given point in time. You cannot negotiate with the seller. A Deed of Trust's price is open to negotiation between you and the seller.
All stock sellers receive the same price at any given moment (for the same stock). All Trust Deed sellers can shop for the best possible price at that given time. And I, personally, will sell any notes brokered by me and charge you nothing.
A stock owner's name is secret; you can never negotiate with him or her personally. A Trust Deed owner's name and mailing address is always made a matter of public record. You can easily send a letter to negotiate with him or her.
A stock is almost always sold ABOVE the value of the collateral (book value). A Deed of Trust is always sold well below the value of the collateral, or at least any of your T.D.'s should have nearly two-to-one in collateral (if you're following the rules).
A stock owner's rights are strictly parceled out by the federal government in the event of a default. A Trust Deed owner's rights are set by state law and are normally very broad.
A stock owner has no control over his investment whatsoever in case of default; he can not foreclose, nor would he want to. He would certainly not want to own, nor wish to pay for the disposal of, bankrupt factories, mills and other commercial/industrial property in far away places. A Trust Deed owner, on the other hand, is in the drivers seat and exercises great control over his investment. In case of default, foreclosure is just one of several options he can chose.
A stock's value, unfortunately, is dependent upon forces over which the investor has no control: in essence, other people's actions (buying and selling on the stock market) and is thus unpredictable. A well secured Deed of Trust's value is largely predictable: it is a function of the value of the property and the knowledge and creativity of the investor. Although you would not want to be in an area like Texas, where some real estate values are shrinking! You would be better off to concentrate on an area where there is a good strong base, where property values and employment are solid. This is why I love California real estate best of all!
Yet every day thousands of people take the advice of a stock salesman's voice over the telephone - someone they know nothing about - and buy stocks without a second thought! But if a friend suggests to them that Trust Deeds are a better investment, they say, "OH NO, TOO RISKY!!"
I believe that the reason this happens is because of a very few people who have broken some of the most basic Trust Deed investment rules, and their blatant, sometimes stupid, simple errors that could have easily been avoided, have given notes and Deeds of Trust a bad name. Every now and then a drunk drives up the freeway going the wrong way, with no seat belt on, at 60 m.p.h., and kills someone. But that doesn't mean that we all should quit driving our cars or quit having one beer at the local pub. There are always some people who will botch up just about anything. Needless to say, Trust Deeds, if done properly, can offer high yields with plenty of collateral. I think Wall Street is a lot like a big, big, gambling casino, whereas Trust Deeds are more like a small, stable, well producing investment!
Here are other items to think about:
If you hold a note and Deed of Trust against some property with a standard acceleration clause in it, those property owner/borrowers cannot sell it, convey it, or do anything with it without your permission, unless they want to run the risk that you'll call the note, demanding a full immediate payoff. If you own stock in a corporation, they can sell their real estate and you would not have the right to say anything about it. I've never known any giant company to call stockholders and say, "We want to sell some of the assets of the corporation, is that alright with you?"
Also, when you lend money properly on a note and Deed of Trust, you or your appraisal representative will agree to go to the property and look at it. I just wonder how many stock market investors have ever physically inspected any of the assets of the corporation of the stock they bought?!!
Again: A stock is a speculation, A Trust Deed is an investment.
Note: Most of the text displayed in bold typeface is taken from
an article by William J. Mencarow Jr. entitled "Stocks -vs- Mortgages",
The Paper Source (a newsletter), July, 1990. To subscribe to The Paper
Source: 1-800-542-2270, or write to: Wm J. Mencarow, Jr., 8420 Porter Ln,
Alexandria, VA 22308.
WHAT THE HECK IS "HARD MONEY"?
The term "Hard Money Loan" as it is referred to in the real estate lending business has a number of meanings stemming from it's root "hard money" or cash money. Hard Money Loan begins with a general meaning related to loan for hard cash. However, the meaning has developed through years to include non conventional real estate loans (privately funded loans, second trust deeds and equity loans) such as those loans one might get from a hard money broker. Usually a loan where the lender can approve the real estate loan request based on real estate equity primarily, sidestepping much of the usual time consuming aggravation and verification that for example a bank might require to lend that same amount of money.
Hard money loans of today (as I understand them to be) are those loans
usually funded at a higher cost to the borrower in exchange for the ease
of obtaining a fast cash type no income verification, no credit check,
no red tape loan.
In my 20 year career I've heard many stories of people in the business around me who were not following the rules, and I wanted to share some of those with you.
November 1971, my very first deal, my first closing, is also my first horror story. I use this story even though it has nothing to do with trust deeds, because it is definitely one of the main stories that stands out in my mind to this day. I was a 20 year old brand new real estate agent in a leisure suit. Winter had just come on and I had just started in the business. After a number of months I had my very first escrow closing and I was terribly excited. I remember getting up an extra hour earlier in the morning, got dressed and went down to the office and sat at my desk waiting for my first commission check. I remember the minute hand passing 9:00 and the secretary there saying "All the recordings go on at around 9:00, so you've officially recorded your first sale and earned your first commission Brad, congratulations!"
At just about 9:05 the door flung open and in came the buyer waving his arms saying, "Hold everything! Where's Brad?"
With a quiver in my voice, I said, "I'm right here."
"Don't record that deal!" he said.
"Why not?" I asked, and added "It already recorded. There's no stopping it now."
And he said, "Then I'm just going to have to sue because the roof fell in on the house just moments ago!."
Apparently during the night the water pipes in the ceiling had frozen
and burst. The morning sun shining on the building warmed and melted the
water in the busted pipes. The water ran in the attic filling it with water
until the ceiling collapsed from the weight.
Of course, I didn't know anything about anything at that point in my career and I figured either this was the end of the world or I had lost my real estate license or I should hang myself or he was going to sue me and I'd have to buy him a new house or possibly something worse that I hadn't thought of yet.
As it turned out, we found that at 9:00, just before the ceiling collapsed and escrow closed, his brand new homeowner's policy of fire insurance and homeowner's insurance also kicked into effect and he was fully insured.
A month later I stopped by and found that for a $200 deductible the man had received all new sheetrock in the living room, all new taping and texturing, all new paint, all new carpet, and a few things thrown in that he didn't deserve. So, as it turned out, he got a several thousand dollar remodel this older townhouse. It set him back a month moving in, but because he had insurance he was not hurt financially.
The maximum insurance available, whether it be title insurance, fire insurance, homeowner's insurance, I don't care what it is. If your going to do a business deal, I strongly recommend you buy the best insurance you can get, regardless of what kind of insurance, and things will work out better for you when the worst happens. Believe me, expect the best but be prepared for the worst.
Probably the one person who had the most impact on my real estate career was a very nice little older man and lady who lived in Concord, Anne and Maurie Harbor. He kind of taught me the ropes and showed me about fixer-uppers. Many of my rules, original or early rules in the real estate note business, came from him.
Through an error of his one of my early rules was born. He was a traveling kind of guy. As a matter of fact, one time he sold me his house, his car, truck and boat, all of his furniture and everything else he had. He just took his clothes, a few items out of the kitchen, got in his trailer and took off into the sunset for parts unknown.
After he left, a trustee (holding the foreclosure on a first deed of trust against a property on which he held a second) sent him a letter notifying him the first deed of trust was in foreclosure. The foreclosure department is required to notify anyone of record on a property so that they have a chance to protect their interest by possibly bringing the first deed of trust current or doing whatever they have to do.
Anyway, he had landed somewhere in Texas for a year or two and had neglected to update his forwarding address from a postoffice box somewhere that he never checked. Eventually he discovered there had been the foreclosure sale by the first holder and that his $10,000 second had been wiped out or off the record. He had been properly notified but hadn't received the notices due to his error.
It's really important to keep a good address somewhere, especially if
you're going to travel, whether it be your daughter or son or some relative
or partner or friend, you must maintain a good mailing address.
Some of the following stories are recapitulated by the author as told
by the individuals:
A man came to me with a large parcel of land, 20 acres in Oroville, of which was split into several pieces, a small portion was zoned commercial, another portion was zoned for several lots, there was another area zoned for high density for apartments and it really looked like a worthwhile viable project. He also came to me with an appraisal in hand of, I believe, approximately $300,000, and relying on his family reputation, I accepted it at face value that it was an accurate indication of the property value. I didn't investigate the property further. I didn't feel it was necessary.
He wanted a 50% loan which represented about $175,000 which seemed reasonable to me. After no payments for almost two years and a lengthy legal battle, I ultimately had to take the property back through foreclosure.
As it turned out the property only had a "tentative" approval for these purposes. A map had been applied for, but no final approval had ever been received for splitting this property into the four parcels. The county had come back with many conditions which amounted to several thousands of dollars in streets and road improvements, utilities and school fees and just costs of splitting the property. The appraisal that I was presented up front with for $300,000 eventually turned out to be an appraisal that was pure poppy cock from an appraiser who was less than scrupulous. The borrower, Mr. C., then took the proceeds from the loan and basically skipped, leaving me holding the parcel. It was a major emotional strain on me at the time and intensified because I was sick. It was a very ugly situation.
I now own this property, after taking it back, that can't be completed
in being split and the clincher was that the very final blow was when I
found out that only 30 days prior to my making this loan, he had just purchased
the property and had only paid $125,000 for it.
I got stung badly trying to operate on my own on a note once. I met Brad Evans through a mutual friend. My daughter had some money in an inheritance trust to invest. I'd been in the real estate business for 25 years, or 30, and I really didn't think that Brad Evans had anything to offer me that I didn't already know or couldn't offer myself, except that he was actively engaged in finding loan opportunities and I wasn't. I felt that I was just as licensed, just as capable, just as experienced, having been in the business longer than he had, I was much more equipped to handle these investments my own way.
I funded a note and deed of trust through Brad, and later when the loan came due I decided to extend the loan myself for the borrower so that I could charge them a few fees and I wouldn't have to bother making a big to do about it. So, here's what happened.
The borrower called me a couple of times and said that his loan was coming due soon, it's a new house, I've got it on the market, have a few bites, couldn't we extend it for another six months or a year? I told him no problem, I'm licensed, I'll do it for a few points. The borrower said fine. There's no need for us to call Brad Evans, he'll just charge us more and so why don't we extend the loan on a shake for a fee, and he mailed me a check directly.
The loan only represented a fraction of my daughter's investment proceeds which I was very glad of later when I eventually lost my entire investment because of my own stupidity. In trying to handle my own extension, I had apparently overlooked some very basic rules which resulted in total loss of my loan and loan proceeds. Kind'a like accidentally gettin' on the freeway goin' the wrong way.
What had happened was the note was a second note and deed of trust, a junior loan behind a construction first loan and the borrower failed to tell me that the larger first was also due soon. I didn't know that his first loan was due six months from now. Brad had set up my deal to come due six months before his first was due so I would have ample time to foreclose and take the property back before the large first ahead of my second became due and in my blind greed in order to collect the loan point myself, I had now extended the loan for a year which is six months beyond the due date of the first loan ahead of me.
As it turned out, the property went into foreclosure and I didn't happen to have the money needed to pay the first note and deed of trust off. It wasn't a loan that could be reinstated for back monthly payments only. It was a loan with a full principal balloon payment due and I had broken a very basic cardinal rule. Extending a loan requires caution, the same as originating another loan or agreeing to another loan. Without checking the due date of any senior loans ahead of mine. I'd failed to follow all the tips provided by Brad.
Had I gone back through the broker and had him handle the extension for me, as he does on all loans in the past, he would have ordered a brand new title insurance policy, he would have required that the first loan be extended so that it was six months or a year longer than my junior loan, and would have protected me from this entire situation.
So I clearly understand that by failing to follow the tips what happened
was my own fault. In trying to earn a few hundred dollars in points, I
lost my entire investment.
I moved to California recently to retire and chose Northern California
specifically because I love the pine trees and I have always loved the
foothills and Grass Valley seemed like a wonderful area in particular to
I had done well in my business career and inflation hadn't gotten to me because I kept enough parcels of real estate for a long period of time, not by my own choice, and it actually worked out very well for me. I stayed in the same career for a number of years, so I never lost my assets on any bad businesses or anything like that.
I reached a point in my life where I was suddenly able to retire. My children were grown and I was getting older. I wanted to fund some notes and deeds of trust that I could give to my children as a gift. I figured if I gave them cash that they would spend the money right away on something that wouldn't yield them the peace of mind or security that a trust deed would. My only major concern was that if I bought short term trust deeds and gave them to my kids, when the trust deeds became due in a year or two, the kids would then get the cash and spend it.
So, in an effort to compensate for this, I specifically requested some 15 year notes and deeds of trust. Brad told me that he didn't get involved in much of anything that was over three and maybe at the absolute maximum of five years in terms. He recommended six months up to three years as a safe duration or term for a note and deed of trust investment. I explained my situation to him and I told him that didn't apply to me because I had a different scenario and insisted that I wanted some 15 year loans.
He told me that against his standard procedures he would accommodate me as a special request. I remember looking back on it now, funding a note and deed of trust, a rather large one for 15 years so that I could leave that to my son and he wouldn't be able to get out the principal and spend it.
Later, my life changed radically. My wife developed cancer and passed away. My own personal financial and health suffered greatly and I reached a position where because I was ill physically and financially, medical bills had taken a good portion of what we had set aside for retirement. Along with those failures, like dominoes, many other things happened to me and to make a long, long story very short, I had to change my will temporarily and reverse leaving the notes and trust deeds to my son upon my death for his long term income. I was in a position where I desperately needed to liquidate the notes for my own survival.
I went back to Brad, as he offers a service to sell any note and deed
of trust for free, and I asked him if he could sell the note. He had previously
indicated that funding a note of more than three years was not a part of
his standard procedure because if you ever had to sell the note, it could
be very difficult and terribly expensive. That was why he didn't want to
recommend funding a 15 year loan in the first place.
SINGLE, FEMALE AND ANONOMOUS:
I sold my house in Sacramento about a year after I had gotten a divorce because my husband married my best friend who lived next door. I tried to hang on. I got the house in the divorce settlement. I tried to hang onto it, but I just couldn't, so I sold the house and was behind on my payments at the time.
When they brought me the deal and asked me to carry back a note for part of the purchase price, I really felt that I had to in order to make this deal. The borrower put about 10% down and I had the house half paid for, so it was about half the value of the house still owing on a first, so I carried the balance on a second. I thought that would be good because that would be monthly income for me which I needed. That was the reason I was selling the house, because I didn't have enough income.
I relied solely on my realtor's advice, and she said, "Carry the note, carry the note, carry the note, because you can always sell it if you decide you don't want it." Well, boy, was she ever wrong!
The people got behind on their payments and stayed behind. I couldn't foreclose because I didn't have the money to bring the first current and to pay the foreclosure fees. I was barely getting by. Now, without the monthly payments from the note, I was really scraping, pinching every penny. So I went back to the realtor and I told her I had to sell the note. I didn't want to, but I had to. As it turned out, I was lucky to get about 50 cents on the dollar. I found out that I could have gotten 80 cents or 90 cents on the dollar, had I carried it for a shorter period of time and required the borrower to put more money down, but because the note represented a 90% loan to value ratio in a junior lien position, and had a 20 year amortization, I had to sell the note for under 50 cents on the dollar. I had no alternative.
I look back on the deal now as a terrible mistake, in my opinion, for
listening to my realtor, because although she was very honest and very
professional, I think she simply lacked the knowledge, the specific knowledge
of notes and what they're worth. I remember turning down an all-cash offer
on the house that came in at $80,000. The house was listed at $100,000
which would have given me $30,000 without all this trouble a long time
ago, but as it was, I had to sell my $40,000 second because I had carried
it at 8% interest. I had to sell it for 50 cents on the dollar and ended
up with less than $20,000.
I trusted a guy. He came over to my house and knocked on my door and we talked and talked and talked and he looked me right in the eye, and I haven't been in this country for very long, but in the old country where I come from, that's all a man needs. His word is good. His handshake is good. But, I guess that's not the way it is here. I found that out.
I should have used a broker. I broke rules. I lost $50,000.
The property looked real good, and he needed the money right away for another deal. I trusted him, so I wrote him a personal check for the money. I thought he would take my personal check and trust me as i trusted him.
I was afraid Brad would find out. I don't know why I did it. I guess it was because he offered me 17% and I believed him. He said he would type up the note and sign it, record it Monday and mail it to me. This was on a Saturday.
I did get a note eventually, and my lawyer got lots of money from me
over the last two years to chase this scoundrel. The note was behind many
other notes and he had so many other liens and money he owed on the properties,
both properties, that my loan wasn't worth anything. My lawyer said we
could sue him and get a judgment and after lots of fees I paid the lawyer,
he did, but that bum has nothing. He is in jail now for something else
he did and I'm glad he is. I guess I broke every rule on the list: never
give money to anybody but the title company. Never make a note without
title insurance, and always use a broker. I know! Believe me, I know!
A long time friend and business partner of mine, together with myself, subdivided some land that I had owned for a number of years and he being a broker in real estate was going to handle the subdivision and sell the lots for me. There were 15 lots total.
I didn't had a lot of experience in real estate and this property had been in my family for a long time. We owned it free and clear, outright. We subdivided the property into 15 lots and it took a number of years, in fact, it took two years longer than we thought it would. The subdivision turned out real nice. We put some big signs out. Some of the lots started to sell.
I think a day didn't go by that somebody didn't ask me if I was willing to subordinate. My friend and partner knew all about real estate, so I figured I would leave that up to him, because I didn't even know what the word meant! Subordinate to the construction financing? Do the lots contain subordination?
I hadn't heard of Brad and I didn't even know what subordination meant. I figured that I owned the property and that was enough for my part, and my partner could figure out all the rest.
I was wrong! Even a very basic knowledge, even a beginner's basic knowledge of subordination would have come in very helpful, and probably have saved me a lot of money.
Some of the buyers on some of the lots that sold asked me to carry a note. Remembering my Dad talking about his brother who had a lot of notes, not a lot, but a few during the depression and everybody lost their jobs, they didn't pay on the notes and the house, the real estate was almost worthless, so therefore I was afraid of notes because I didn't understand notes and trust deeds.
Looking back now, I guess it was only because I didn't understand the difference between a good note and a bad note. I just knew that my Dad's brother lost a lot of money that he loaned on notes, so I just figured most notes were potentially bad, so I tried to avoid ever carrying a note on the sale of these lots whenever I could.
Later, I found I had to carry some notes and they seemed to work out okay, because I made sure the people put enough money down, but this one guy came along and wanted to buy four. He was a hot dog spec builder I guess, and he asked me if I would subordinate to four construction loans.
Well, I suppose if the buyer/builder had ever completed the homes, everything would have been okay, but he turned out to be a flake and skipped town halfway through the project. That's when I found out the meaning of subordination!
I guess I really just gave him my equity in the lots free and clear so he could go get a loan at the bank. I guess I gave the bank my equity in the lots for their loans so they could give the loans to him. He didn't have any equity. Anyway, when he skipped town halfway through and didn't pay, the whole thing turned into a big mess.
The construction loans were in foreclosure, I had my loans were in foreclosure, my partner kept saying don't worry, I kept worrying and one of the four houses that was almost all the way done was the first one to go to foreclosure sale.
As it turned out, there was a man who had wanted to buy that house before foreclosure anyway, and since he couldn't get hold of the flake who had left town, he just waited and bought it up in foreclosure, and I got paid off.
But, the other three houses were not done. Rain was getting in them. My lawyer said that I had to pay all those construction loans, those loans that were on those lots. Didn't matter that the lots were gonna be in my name after I foreclosed on my seconds. Those construction loans were on there ahead of me because I subordinated to them and allowed them to be.
I thought about suing the construction lender, but later it turned out it wasn't their fault. I had to keep paying my lawyer to go here and to go there and do this and do that, and I had to keep making the payments on all those construction loans. And now I'm trying to finish these three houses and sell them.
Emotionally, this whole experience almost killed me. I think I learned more about real estate in the last two years than I did in the first 62 years. Don't ever subordinate unless you know what the heck you're doing! Unless you have the money to take over those construction loans that you subordinated to, because if the buyer skips town, you'll have to take responsibility for all those construction loans that you subordinated to or your interests will be wiped off.
My lawyer told me that the buyer, the flake who left town, called and said he would grant deed those properties back to me, but my lawyer said not to do that because there might be mechanics liens, IRS or other liens. I didn't know enough to get mechanics lien title insurance coverage when I sold the lots and carried those seconds and subordinated; so now I might be out all that money, too. I wished I'd read Brad's article on subordination and the safety checklist.
The only person or persons who made a lot of money in this deal was my lawyer. After reading Brad's chapter on subordination, I have clear and perfect 20/20 hindsight vision. I should never have subordinated without demanding the buyer/borrower giving me sufficient additional real estate equity as collateral. I guess subordination would be okay sometimes, but you have to have a picture of what you're doing, which I didn't have.
I'm sure glad my Dad isn't still alive to see what I did! I can hear him now, "I told you that all notes are bad!" That's what he would say! All trust deeds are bad.
Well, I think my Dad's wrong. I don't think all notes are bad. I think,
instead, that some people's intentions are bad, or maybe unrealistic. I'll
never do another note in without consulting all 37 tips.
37 TIPS TO SAFER TRUST DEED INVESTING
1. Is the loan safely between $30,000.00 to $3000,000.00? I don't like to arrange loans under $30K because of the many laws and restrictions that come in to play. Loans above $300K are too large to offer typical investors enough diversification.
2. Is this Trust Deed arranged by a Trust Deed Investment Broker willing and able to verify his long and successful track record of brokering privately funded trust deed investments of this very kind? It's much safer to invest through a reputable, experienced, established professional. You wouldn't consider removing your own appendix, nor would you take "how to" instructions from your golf buddy or your sister-in-law. You would seek out recommendations, referrals to a couple of doctors, well known surgeons specializing in appendectomies! Then with careful consideration, after evaluating each, you'd select the one that's right for you with some measure of confidence. Likewise, take the time necessary to verify your broker's track record, background, experience, and professional standing. Ask for references of others who have invested through him, ask if he complies with all applicable state and federal real estate laws, truth and lending laws, usury laws and other regulations. Don't be shy, a broker that is adverse to these types of questions probably isn't the broker you want, but, if he fits the profile, a courteous and tactful inquiry won't offend him, in fact it's quite possible that he'd be impressed with your desire to choose a skillful broker and make your investments with care. After the first or second investment, you may find your well on the way to a long and prosperous relationship of mutual respect and admiration.
3. Did you and your representative physically inspect this piece of real estate?
4. Have you taken the time to read and understand all the items contained in the preliminary title report for this property? Some of your demands and instructions are revealed to you by the Preliminary Title Report issued by the title company doing the loan escrow and providing the title insurance. Have you pinpointed any items of record that are not to remain of record? Prior liens or loans, taxes owed, judgements, etc. Included in the report are items excluded from the title insurance policy. Have you read the exclusions, if any, and do they meet with your approval. It's imperative that you know exactly whether or not an item of record is a potential unexpected expense or threat. It isn't uncommon to find an item in the report that needs further explanation, when this occurs be persistent, don't allow yourself to fall victim to the possible frustration of trying to get a clear understanding of what the item means to the security of your investment.
5. Are you on the lookout for any adverse conditions affecting the property that aren't of record or that can't be revealed with a physical inspection? I might even ask the neighbors.
6. Did you take the time to establish your own personal opinion as to the value of the real estate collateral by using many (up to ten) different approaches to value? Are you realistically prepared to own this property for the value you've accepted?
7. Did you remember to use the actual purchase price as the value of the property whenever that property has changed hands, sold, or was purchased (all or any part) within the last 18 months? After all wouldn't you agree there isn't a more accurate indication of that property's value than the very price it sold for (no matter what "they" say or how low that value may seem)? I will adjust upwards for verifiable cash or capital improvements to the property since the time it was purchased.
8. Are you absolutely certain that you have not accidentally mistaken any of the "personal" property on the premises for real property in establishing your own opinion of value? (This can become very tricky or confusing with respect to items like trade fixtures, a mobil home on piers, or a hot tub, and many others).
9. Does this trust deed investment represent no more than a 60% loan to value ratio on even the most prime of owner occupied homes, and not more than 50% LTV or less on a home not owner occupied? 60% LTV meaning that your loan's total plus or combined with the total of any other loans or liens ahead of you together should never exceed 60% of the properties existing realistic value.
10. Did you only use "existing" improvements to establish the property's current value and are you sure you are not mistakenly counting promised or proposed future improvements as collateral today? Arranging loans with draws based on some future work or improvement can be very tricky to beginning investors. (that's another book). Never rely on future promised improvements unless proper draws for the work to be completed have been set up.
11. As a written condition of funding this loan have you required a full extended A.L.T.A. lenders policy of title insurance with no deletions? Don't get caught by hidden, overlooked or even future defects of title. If you have not, eventually you will lose your money to defects of title, mechanics liens or other items not covered by limited A.L.T.A. coverage or standard C.L.T.A. coverage. Never involve yourself with real estate transactions or any trust deed investment without requiring the maximum title insurance coverage available to protect your note and deed of trust and it's position from unexpected or undisclosed liens or other defects of title. Inadequate, limited, or no title coverage constitutes one of oversights most commonly resulting in the loss of ones entire investment! Well meaning brokers, friends, partners and relatives can and do unintentionally bury less knowledgeable, less aware private lenders with unforeseen surprises, liens, taxes, and even other loans, items of record pop up unexpectedly and permanently ahead of the promised position. Without the proper title coverage on every trust deed, every time, you will not survive long!
12.Does this Trust Deed's total required investment represent more than 10% of your total overall investment portfolio? The smaller your Trust Deed investments, the higher your degree of diversification! This can be mighty important to an investor planning to rely on the monthly payments generated by Trust Deeds for income!
13. Are you confident that you have ultimately committed yourself to the shortest possible loan term? If the need or desire to liquidate were to arise a Trust Deed funded for too long a term can be difficult, expensive, or even impossible to liquidate. One reason behind this possibility is the fact that wise Trust Deed investors are interested in Trust Deeds that are both safe and yielding the highest, currently available rate of return. The rate of return fluctuates and what is attractive this year, may not be in the competition a year or two from now, even if the difference is a fraction of a percent. The Trust Deeds I arrange/broker usually will not exceed three years unless I feel certain that the investor is fully aware of the difficulty he might be faced with should he decide to liquidate.
14. Will your funds be made payable directly, or deposited directly, to a reputable, bona fide and above all "independent" escrow company, not owned by the broker arranging this loan? A broker handling funds, even in a trust account, is in my opinion, inappropriate. This lends itself to endless damaging possibilities, from simple bookkeeping errors all the way to blatant misappropriation of funds. The definition of the word escrow is "law or written agreement put in the hands of a third party until certain conditions are met". The key words being "third party", which, as far as I'm concerned implies one who is neutral, detached, impartial, none of which describes the broker arranging the loan. As the broker, and far from neutral or impartial, I never handle investors funds for any reason or at any time, this includes any stage of the process of an investment arranged by me, therefore I can never, even accidentally, be guilty of mishandling funds, and I can never be accused of the same.
15. If this T.D. is to be secured by raw land or even improved "commercial" real estate are you certain that your loan does not exceed a 35% L.T.V. maximum allowable loan to value ratio unless you want to buy it?
16. Can you always be reached by mail at the address of record listed on all your recorded documents? Can you always be reached the quickest at the address used? Remember the man who's second was wiped out at a sale as he was out of the state in his motor home for 6 months and never saw the notice in his box till it was too late!
17. Are you sure that you and or your trusted representatives have not overlooked or forgotten to include any important clauses? (Acceleration or due on sale, late charge, timber clause, partial reconveyance, prepayment penalty, and more.)
18. Did you require the purchase and prepayment of 12 months fire insurance
premium paid in full, in advance, in escrow (as coverage will cancel if
19. Are you prepared to fill out the 90 day notice of balloon payment (if this loan is for less than one year and on owner occupied property) at close of escrow, and attach it to the note and mark the calendar. Will I remember to send the notice by "certificate of mailing" ?
20. If there is to be more than one lender on the note did you ask about power of attorney only to foreclose if one partner is not available when and if the borrower defaults? What about loan servicing? Who will hold the note? (It is illegal for my broker to hold my original note for me.
21. Is this borrower in a loan cycle? I won't rewrite any of my loans for any more than the amount of principal owing only forcing the borrower to come up with points, closing or more in order to close escrow rewrite escrows. I would only increase a loan upon rewrite if it was below the conservative L.T.V.
22. Did you ask the borrower how he plans to repay this loan? Although we hang our hat on the real estate, it's a good idea to get a feel for how the borrower operates (what he intends). It isn't often, but now and then you'll discover the borrower hasn't the vaguest idea what he's getting into. You might save both of you a lot of time and headache.
23. Do you want or need any additional documentation prior to close? Such as but not limited to the following: final permit card signed off, certificate of occupancy, notice of completion, well report, code compliance inspection, final recording of lot split, copy of any existing lease rental agreement, proof of purchase price, any closing statements, copy of any additional existing appraisals...other inspections; toxic reports, roof reports, termite inspection that may have already been made.
24. Are you certain you are not allowing a corporation to act as a borrower alone without requiring the corporations owners to sign individually as personal guarantors on the note or even on a special guarantor form if necessary. The ability to obtain a deficiency judgement against a $500.00 corporation could be fruitless. A borrowers motivation to walk might be hindered if his own personal name is on there along with the corporations.
25. Are you confident that you are not making too many real estate loans to one borrower at this time? Without a great deal of experience "one loan" should probably be your maximum limit of loans to any one borrower. Five is my current limit but I broker them with many different investors. Individually you may want to stick to one loan to each borrower.
26. Tax service, have you decided if you want a service to notify you if back taxes stack up on the property your loan is against?
27. Did you make all of your instructions to the escrow in writing? Never assume that a verbal instruction and/or demand is heard, understood or even remembered! Written instructions are indisputable, are evidence of their own existence. Written, unlike verbal instructions, are not easily misconstrued, distorted or forgotten. It's unfair to expect a busy escrow officer with a phone in each ear to comprehend and remember a verbal instruction. And if you later discover that the instruction wasn't carried out to your satisfaction, how could you establish that you had even given it? You couldn't. It's equally unfair to expect (or trust) yourself to remember all the little details when making your list of instructions, requests, questions and demands for the escrow. Do you have a reference checklist so that you don't forget any of your requirements when compiling your instructions? Our computers have the safety check items built into our instructions and automatically remember for us with each escrow as the instructions are drawn.
28. Are you familiar with the simple steps necessary to have the title company promptly file notice of default on a delinquent borrower? The title company will cheerfully handle most aspects of this process for you. Are you also prepared to file promptly at the time when any two monthly payments are both late (or when any past due balloon has also passed the specified grace period)? Are you prepared financially as well as emotionally for that inevitable "one" out of every 127 borrowers statistically who will file bankruptcy subsequently delaying payments and or any payoff of that loan for six months or even up to a year or more on occasion? Can you handle this situation if you know your investment is very well secured and you have total confidence that you will be paid off in full eventually with all interest due together with all proper late fees and penalties because you bothered to follow these 37 tips and among other things you know that the real estate is worth a lot more than your loan in case you did have to foreclose and take the property back?
29. Are you certain that this transaction is not making any loan extension, additional advance or modification or other change of any kind to any existing real estate loan without first seeking the written authorization and legal approval of any/all junior lienholders of record? It may be safer to let an experienced T.D. broker oversee the proper handling of all extensions, modifications, rewrites, subordinations, having the title co properly update all fire and title policies, which will require the title company to obtain all junior lienholder legal written approvals, as well as getting all the proper modification doc's recorded.. and issuing a brand new full A.L.T.A. extended lenders title policy with no deletions to best protect your investment.
30. Are you certain that this transaction is not subordinating away too much real estate equity to another? Learn how to recognize and avoid equity skimming, cash backs, and even the blatant "misuse of subordination". Common trust deed fraud scams and rip offs can oftentimes be easy to spot if you know what to look for and where to look for it. Are you certain that the combined total of all real estate loan proceeds (plus any other financing or money being released to the buyer) in this transaction does not exceed what you would be willing to pay for that property exactly as it sits today? What will your equity position be if no improvements are ever made to the property? Are you absolutely certain that no one needs to ask for a little more cash down payment, and or even some additional real estate equity or additional collateral to adequately secure this particular T.D.?
31.If this is to be a junior loan, did you receive verification and or accurate proof of any loan balances and due dates as well as all other pertinent information on any senior loans ahead of your junior loan?
32. If this is to be a junior trust deed, did you make certain that the due date of your junior loan falls safely far enough ahead of the due date of any senior loan(s) that might be in front or ahead of your loan? I require all loans (straight notes and not fully amortized loans) ahead of any junior loans I broker, to be due at least a minimum of a year or two after my junior loan due date. It's a lot cheaper to cure a senior loan ahead of your loan for only back payments than it is to cure that loan ahead of you by having to pay the entire principal balance off because an early balloon payment is now due and payable in full on the senior loan and foreclosing ahead of you.
33. If this is to be a junior loan, do you have enough cash to cover at least 6 to 12 months payments on loans ahead of your loan to be held in reserves at all times?
34. If this is to be a junior loan, do you clearly understand specifically what will be required of you to protect your position if problems do arise? Don't ever invest in a trust deed secured by a junior loan behind any senior loan that you yourself can't feasibly afford to assume full financial responsibility for. You may be forced to take over full responsibility for all loans ahead of yours in order to foreclose and protect your investment or if you don't then face total loss of your investment. Ask for more cash down, more additional collateral (that also has to again meet all the 37 safety tip items) or both! Recheck any loan you subordinate to against all 37 points, and never agree unless it improves your equity position, pays a lot more, and you fully understand and can handle borrower subsequently skipping town! If I am subordinating any of my interests do I clearly understand what will be required of me legally and financially to avoid the loss of my remaining interests should problems arise?
35. If this is to be a junior loan, have you made certain that the senior loan doesn't have any type of provision or ability allowing it to grow or increase in size in any way? An example would be a home equity line of credit with a maximum loan amount greater than what is presently owed where the borrower can take out up to that maximum at any given time.
36. If this is to be a junior loan did you remember to (ask your escrow officer to) file a "Request for Notice of Default", and or consider other notifications? However, the first holder might wait two or three years to file a Notice of Default (NOD), you may then wish you had also filed the even superior document, a Request for Notice of Delinquency". Ask your title company plant manager.
37. How does this loan prospect smell? How does it sit with your inner
gut feeling? Your nose knows the answer. If you've made it this far and
past the first 36 tips, then the final judgement call is yours!
1. Is the loan safely between $30,000.00 to $3000,000.00?
2. Is this Trust Deed arranged by a Trust Deed Investment Broker?
3. Did you and your representative physically inspect this piece of real estate?
4. Have you read all the items contained in the preliminary title report?
5. Are there adverse conditions that aren't of record or can't be revealed with a physical inspection?
6. Did you establish your own personal opinion as to the value of the real estate?
7. Did you remember to use the actual purchase price as the value of the property?
8. Are you certain you haven't mistaken any personal property for real property?
9. Does this investment represent no more than a 60% LTV ratio on an owner occupied home, and not more than 50% LTV or less on non owner occupied?
10. Did you only use "existing" improvements to establish the property's current value?
11. Have you required full extended ALTA lenders title insurance with no deletions?
12.Does this loan require more than 10% of your investment portfolio?
13. Have you committed yourself to the shortest possible loan term?
14. Will your funds be deposited directly, to an independent escrow company?
15. If this T.D. is to be secured by raw land or even improved "commercial" real estate, are you certain that your loan does not exceed a 35% LTV?
16. Can you always be reached by mail at the address of record listed on all your recorded documents?
17. Are you sure that you and your trusted representatives have not forgotten to include any important clauses?
18. Did you require the purchase and prepayment of 12 months fire insurance?
19. Are you prepared to fill out the 90 day notice of balloon payment?
20. If there is to be more than one lender, did you ask about power of attorney?
21. Is this borrower in a loan cycle?
22. Did you ask the borrower how he plans to repay this loan?
23. Do you want or need any additional documentation prior to close?
24. Are you certain you are not allowing a corporation to act as a borrower?
25. Are not making too many loans to one borrower at this time?
26. Tax service?
27. Did you make all of your instructions to the escrow in writing?
28. Are you familiar with the simple steps necessary to have the title company promptly file notice of default on a delinquent borrower?
29. Are you certain that this transaction is not making any loan extension, additional advance or modification, or other change of any kind to any existing real estate loan without first seeking the written authorization and legal approval of any/all junior lienholders of record?
30. If this is to be a junior loan, are you certain that this transaction is not subordinating away too much real estate equity to another?
31.If this is to be a junior loan, did you receive accurate proof of any loan balances and due dates as well as all other pertinent information on all senior loans ahead of your junior loan?
32. If this is to be a junior trust deed, did you make certain that the due date of your junior loan falls safely far enough ahead of the due date of any senior loan(s)?
33. If this is to be a junior loan, do you have enough cash to cover at least 6 to 12 months payments on loans ahead of yours?
34. If this is to be a junior loan, do you clearly understand specifically what will be required of you to protect your position if problems do arise?
35. If this is to be a junior loan, have you made certain that the senior loan doesn't have any type of provision or ability allowing it to grow or increase in size?
36. If this is to be a junior loan did you remember a "Request for Notice of Default" and "Request for Notice of Delinquency"?
37. Have you consulted your inner gut feeling?
DEVELOPING A CLIENT BASE OF YOUR OWN
It isn't how big a company is that regulates how admirable and honorable their service is. Many times you receive better service from a local mom and pop grocery store, a local butcher or a one man carpet cleaning service than from a large conglomerate. A one man operation is sometimes better equipped to give your needs first hand attention. And so it is with loan brokering.
Retired people and other smart people will realize and appreciate your personal touch, know the value of it, and come back to you for life.
All through my career, there were two ingredients that came through for me, those two being my rules of private lending and of course, the private investors themselves. They were always there and for the right yield they came through in a hurry.
An individual could very easily earn six figures a year working part time assisting retirees showing them how to invest safely in deeds of trust using nothing more that what is contained right here in this book.
With my own career, in the very beginning I visited the county records division and searched records for the name of every person I could find who had a deed of trust. This information can be found under every deed of trust and "Request for Notice of Default" recorded.
Also, county records contain the name and address of lenders at the top of every deed of trust. . . . When recorded return to: lenders name and address
I built my own mailing list of several hundred names this way. Additionally,
I ran an advertisement in the newspaper under "Money Wanted" that read,
"Will pay 15 percent interest. Want to borrow $100,000 well secured by
$200K prime single family residence in Northern California.", with my phone
number. I added the word "broker" as is required by law. I didn't get a
lot of calls, about one per week for a year that added up to about 50 new
investors. Then many of my best investors came to me by word of mouth referral.
While I could not meet with each potential investor right away, I did schedule to meet them at a later date. I kept tract of each of these people and as they gained experience and success investing through me, they eventually brought in a friend or relative with funds to invest along with them.
Soon we began to turn people away. My wife and I opened thirty construction loan escrows in one month alone. The business had truly grown!
While I'm happy to sell other investors a copy of my book, and I'd be happy to share any information or answer any questions that they may have, I am not looking for any more private investors myself. I can barley service the ones that I have and I can't take on any new clients until they add another few days to the week.
Obtaining investors is no problem if you have good loans and you're willing to make an effort to stand behind your work. The only trick to it is to be consistent about following the 37 tips every time - and don't break these rules! You'll have more lenders clamoring at your door that want to invest money through you if you decide to make trust deed investing an occupation and share this information with other people. As a private investor, you will have the best advice to share and the best returns available without gambling.
As long as you follow the 37 tips religiously, the only other ingredient that you're going to need is a good title company that will issue A.L.T.A. policies on all your loans. Once they recognize the volume of business you plan to do, they will see you as some kind of a small institutional lender rather than a private individual.
You can create a steady influx of borrowers by contacting people in the real estate business with a flier or post card, that's what I did. I told how I offered swing loans, equity loans, land loans, and construction loans and that I would buy their discounted notes and deeds of trust. I offered short-term real estate financing of any kind and could close a loan in sometimes as little as fifteen days as opposed to a bank that would take months. As long as the collateral was there, I found a constant influx of people wanting to borrow money right my own town.
I also sent fliers to contractors and others from county records who had applied for a residential single-family home building permit within the last six to twelve months.
Contractors need short term private money for:
Construction permit buyers of record all need:
Realtors all need:
PRIVATE INVESTOR'S COMMENTS
The following are opinions and comments from investors. Some may not necessarily be the opinion of the author but have been provided as a real look at real investor's real life comments. The actual letters are on file for your viewing in my office.
living the good life."
When you find a broker that understands your risk tolerance and yield requirements, stick with him or her, they can match you with current clients' needs."
ABANDONMENT: Act of letting property remain unused.
ABSTRACT: The notes made by a title examiner based on his examination of the land records. These notes are a concise summary of the transactions affecting the property. The title agency produces a BINDER from the information in the abstract.
ABSTRACT OF JUDGMENT: Summary of a court's order. When recorded it creates a general lien upon real and personal property of a judgment debtor in the county where recorded.
ABSTRACT OF TITLE: Summary or digest of documents affecting title to real estate (in chronological order).
ABUTTING: Land that touches or borders the land of another.
ACCELERATION: The right of the lender (mortgagee) to demand immediate repayment of the mortgage loan balance upon default of the borrower (mortgagor).
ACCELERATION CLAUSE: Provision in a trust deed or mortgage which makes the balance owed, immediately due and payable upon the happening of a certain event.
ACCEPTANCE: Consent to an offer to enter into a contract.
ACCESSION: Acquisition of property by its union with other property.
ACCOUNTS RECEIVABLE: Moneys earned but not yet received.
ACCRETION: Gradual deposit of soil by water onto adjoining property.
ACCRUAL FOR DEPRECIATION: On accounting statements, the provisions made for anticipated depreciation. In the income approach to appraisal, a provision included in the capitalization rate to provide a return of investment out of income.
ACCRUED DEPRECIATION: Depreciation which has accumulated over a period of time.
ACCRUED INTEREST: Interest which remains in an account instead of being immediately remitted to the depositor.
ACCUSATION: A written statement of charges setting forth the acts or omissions with which a licensee is charged; delivered to the licensee prior to a hearing regarding a possible revocation or suspension.
ACKNOWLEDGEMENT: A formal declaration before an authorized official (usually a notary public) by a person who has executed a document, that he or she in fact did execute (sign) the document.
ACRE: A measure of land equaling 43,560 square feet of land area. (A square acre is approximately 209' x 209'.)
ACTION OF THE SUN: A consideration in the selection of a retail store location. The shadiest side of the street, the south and west sides are most desirable.
ACTUAL NOTICE: To inform, to express, or to have information of a fact.
ADJUSTABLE RATE MORTGAGE (ARM): The payment and the interest rate may go up or down according to some index that they are tied to, on this type of mortgage loan.
ADJUSTED COST BASIS: The value on the books of a taxpaper, which is original cost plus improvements less depreciation.
ADMINISTRATIVE PROCEDURE ACT: Outlines the procedure the Real Estate Commissioner must follow in order to discipline a licensee.
ADMINISTRATOR: Person appointed by the probate court to administer the
estate of a deceased person.
ADMINISTRATRIX: A female administrator.
AD VALOREM: A Latin term meaning "to value" or "in proportion to the value."
ADVANCE FEE: Money demanded or collected from the owner to pay for promotional service in the form of advertising in a publication devoted to describing properties available for sale or lease.
ADVERSE POSSESSION: The open and notorious possession and occupancy under an evident claim or right, in denial of or opposition to the title of another claimant.
AFFIDAVIT: A written statement of facts sworn to or affirmed before an authorized official (usually a notary public).
AFFIDAVIT OF TITLE: A sworn written statement in which the grantor or seller attests that since the title examination or the date or contract there have been no bankruptcies, judgments, or divorces; no repairs made to the property which have not been paid for, no defects in the title of which he has knowledge, and that he is in possession of the premises.
AFFIRMATION: A solemn declaration by a person whose religious beliefs forbid the taking of an oath.
AFTER ACQUIRED TITLE: "When a person purports by proper instrument to grant real property in fee simple and subsequently acquires any title, or claim of title thereto, the same passes by operation of law to the grantee or his successors."
AGENCY: The relationship of trust in which one person (the agent) represents another (the principal) in dealing with third parties, as authorized by the principal.
AGENT: A person authorized by another to act for him or her.
ALCOHOLIC BEVERAGE CONTROL ACT ("ABC"): A California law regulating the sale of alcoholic beverages.
ALIENATE: To transfer the title to real property from one person to
ALTERNATIVE FINANCING: Mortgage financing other than a 30 year fixed rate mortgage, usually provided by an institutional lender.
ALIENATION CLAUSE: A special type of acceleration clause which demands payment of the entire loan balance upon sale or other transfer of the title. Commonly known as a "due on sale" clause.
ALL INCLUSIVE TRUST DEED or "WRAP-AROUND:" A financing device whereby a lender assumes payments on existing trust deeds of a borrower and takes from the borrower a junior trust deed with a face value in an amount equal to the amount outstanding on old trust deed and the additional amount of the money borrowed. May also be credit extended by a seller when the buyer takes title subject to existing financing.
A.L.T.A. TITLE POLICY: (American Land Title Association.) A type of title insurance policy which expands the risk coverage normally given in a policy of standard coverage. Added coverage includes facts a physical survey would show and rights of parties in possession.
ALTERNATIVE MINIMUM TAX: A flat tax applied on alternative minimum taxable income to ensure that everyone with income above a certain level pays some income tax.
ALLUVION (ALLUVIUM): Soil deposited by accretion.
AMENITIES: Attractive or desirable features.
AMENITY VALUE: The value of the pleasures of the property such as good neighborhood, schools, parks, playgrounds and other tangible (or intangible) items which are measurable on the market.
AMORTIZATION: The liquidation of a financial obligation on an installment basis. (Also, recovery, over a period of time, of cost or value.)
AMORTIZATION TABLES: Published tables of payments required to amortize loans at various interest rates over various periods of time. Largely replaced by financial calculators.
AMORTIZED LOAN: A loan that is completely paid off, interest and principal, by a series of regular payments that are equal or nearly equal.
ANCHOR TENANT: The key tenant in a commercial property. Since the quality of the tenant usually dictates the size of the mortgage that can be secured for development purposes, a large national firm is most desirable.
ANNEXATION: An addition to property by the act of attaching a smaller thing to the larger property. Usually attaching personal property to real property.
ANNUAL PERCENTAGE RATE (A.P.R.): A term used in the Truth in Lending Act. It represents the relationship of the total finance charge (interest, discount points, origination fees, loan broker commission) to the amount financed.
ANNUITY: Annual income. A series of assured equal or nearly equal payments to be made over a period of time. The installment payment due to the landlord under a lease is an annuity.
ANTICIPATION, PRINCIPLE OF: Affirms that value is created by anticipated benefits to be derived in the future.
APPLICANT: A person or firm applying for a loan.
APPRAISAL: Estimate or opinion of value as of a specific date, usually by an appraiser who is considered to be an expert in real estate property valuations. The appraisal usually determines how much money the lender will loan on that property.
APPRECIATION: The increase in dollar value of a piece of real estate thru the shrinkage of the dollar itself. If a dollar shrinks and becomes worth a dime it now takes l0 to equal what it used to; or a $50K property will someday be worth $500K thru the effects of appreciation from inflation.
APPROPRIATION (OF WATER): The taking of surplus water for the beneficial use of others.
APPROVED ATTORNEY:An attorney authorized by a title insurance company to handle closings and render title opinions.
APPURTENANCE: Anything incident to or attached to the land which is a part of the property. That which "runs with the land" . . . is transferred with a transfer of the land.
APPURTENANT: Belonging to.
ARRANGER OF CREDIT: A person responsible for the disclosure statements required when credit is extended by a seller of residential property. May be a real estate licensee or an attorney.
ARTICLE 5: Regulates transactions in notes and land contracts.
ARTICLE 6: Real Property Securities Dealer's Law.
ARTICLE 7: Broker's Loan Law.
ASSEMBLAGE: The act of combining two or more parcels which results in some value greater than the sum of the individual parcels. The increase in value is termed plottage or plottage increment.
ASSESSED VALUE: Value placed on property for the purpose of computing real property taxes.
ASSESSOR: Official who determines assessed value for tax purposes.
ASSETS: Anything of value owned.
ASSIGN: To transfer over to another a claim, right or title to property; or to transfer a contractual claim or right.
ASSIGNEE: The person receiving the right or property being assigned (transferred).
ASSIGNMENT: A transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any estate or right therein.
ASSIGNMENT OF RENTS CLAUSE: A clause in a trust deed which gives the
beneficiary the right to collect rents of the secured property in the event
of a default.
ASSIGNOR: The owner of a right or property being assigned (transferred).
ASSOCIATE LICENSEE: A broker or salesperson employed by a real estate broker.
ASSUMED NAME: A name taken or by which a person may be identified, other than his or her legal name.
ASSUMPTION OF MORTGAGE (or trust deed): Taking over the primary liability for the payment of an existing mortgage or trust deed.
ATTACHMENT: Seizure of property by court order to have it available to satisfy a possible judgment.
ATTORNEY IN FACT: A person holding power of attorney from another.
AUTHORIZATION TO SELL: Formal name for document commonly called "Listing."
AVULSION: Sudden tearing away of land by the violent action of a river or other watercourses.
BAILIFF: A court attendant, usually a sheriff's officer or deputy.
BAILMENT: A delivery of personal property by one person to another in trust for the accomplishment of a certain purpose, with a contract, express or implied, that the trust shall be faithfully executed, and the property returned or accounted for when the special purpose is accomplished.
BALANCE, PRINCIPLE OF: Holds that value is created and maintained when contrasting, opposing, or interacting elements are in a state of equilibrium. Value is sustained when the four "agents in the production of income" are in proper balance.
BALANCE SHEET: A financial statement showing assets, liabilities and net worth as of a specific date.
BALLOON PAYMENT: Any payment on a note which is greater than the smallest installment payment. The Real Estate Law defines any payment that is twice as great as the smallest installment payment as a balloon payment.
BANK OF INVESTMENT: A method of developing an interest or capitalization rate by combining the weighted average rates attributable to the components of invested capital.
BANKER'S RULE: The working assumption that a month consists of 30 days, and a year of 360 days, for proration and some other purposes.
BANKRUPTCY: A provision of Federal Law whereby a debtor surrenders his assets to the Bankruptcy Court and is relieved of the future obligation to repay his unsecured debts. A Trustee in bankruptcy administers the assets, selling them to pay as much of the debt as possible. If a seller is in bankruptcy, the Trustee in bankruptcy owns the property and is the party to sign the contract and make decisions. After bankruptcy, the debtor is discharged and his unsecured creditors may not pursue further collection efforts against him. Secured creditors, those holding deeds of trust or judgment liens, continue to be secured by the property but they may not take other action to collect from the debtor.
BARRED (or TO BAR): Obstructed by a barrier which will prevent legal recovery. Such as, barred by the Statute of Limitations since time has lapsed during which one may assert his or her legal rights.
BASE LINE: Survey line running east and west which is used in establishing township boundaries.
BASIS: Property owner's "book value" for income tax purposes. Original cost plus capital improvements less depreciation.
BASIS POINT: Lenders use basis points to measure interest rates in yield calculations. One basis point equals 1/100th of 1% in interest. 100 basis points equals 1% interest.
BENCH MARK: Surveyor's mark made on a permanent landmark.
BENCHMARK PROPERTY: A property used as a standard or base against which comparisons are made.
BENEFICIARY: The beneficiary of a trust. The lender on a note and trust deed transaction.
BENEFICIARY STATEMENT: Statement of a lender, giving the remaining principal balance and other information concerning the loan. Usually obtained when an owner wishes to sell or refinance.
BEQUEATH: To transfer personal property by will. Distinguishable from "devise," which is properly used of realty. But if the context clearly shows the intention of the testator to use the word "bequeath" as synonymous with "devise," it may be held to pass real property.
BEQUEST: Personal property which is transferred by will.
BILATERAL CONTRACT: Contract in which a promise is given in exchange for a promise.
BILL OF SALE: Document used to transfer title (ownership) of personal property.
BINDER: A title insurance binder is the written commitment of a title insurance company to insure title to the property subject to the conditions and exclusions shown on the binder.
BLANKET MORTGAGE (or TRUST DEED): A mortgage or trust deed which encumbers more than one lot or parcel of real estate.
BLIGHTED AREA: A declining area in which real property values are seriously affected by destructive economic forces, such as encroaching inharmonious property usages, infiltration of lower social and economic classes of inhabitants, and/or rapidly depreciating buildings.
BLIND ADVERTISING: Failure by a licensee to indicate license status in any advertising of services for which a real estate license is required.
BLOCKBUSTING (or "PANIC-SELLING"): The illegal acts of inducing the
sale, lease or listing of residential property on the grounds of loss in
value, increase of crime, or decline in quality of schools, due to entry
into the neighborhood of a person(s) of another race, religion, ancestry
or national origin.
BOARD OF EQUALIZATION (STATE): Agency which (1) determines assessed value of public utility properties, (2) supervises county assessors and tax collectors in order to create uniformity in tax assessment and (3) collects sales taxes.
BONA FIDE: In good faith, without fraud.
BOND: An amount of money, often posted with the Court, to guarantee against loss as a result of a possible claim. For example, if there is a LIEN against the property, the owner may post a bond and the lien is removed from the property and the parties argue over the money rather than the property.
BOOK VALUE: Original acquisition cost of the asset, plus the cost of any subsequent capital improvements, less charges for depreciation on both.
BOOT: Something not of a like-kind received in a tax-deferred exchange.
BORROWER (MORTGAGOR): One who applies for and receives a loan in the form of a mortgage. More than one applicant is referred to as co-borrowers.
BORROWER"S EQUITY: The difference between the market value of the property and the total indebtedness secured by the property.
BRACKETING: The selecting of a value that falls within the highs and lows of recent selling prices of comparable homes. Used in the market data approach.
BREACH: Failure to perform a duty or promise.
BRIDGE LOAN: A temporary mortgage loan to help a borrower obtain the necessary cash funds to purchase another home, prior to the sale of their currently owned home.
BRITISH THERMAL UNIT (B.T.U.): A unit of heat measurement. The quantity of heat required to raise the temperature of one pound of water one degree Fahrenheit.
BROKER: A natural or legal person, who for compensation or in expectation
of compensation, acts for another in a real estate or related transaction.
BROKERAGE: The real estate business concerning itself with bringing together buyers and sellers and completing a transaction for a commission.
BROKER'S LOAN STATEMENT: A statement signed and received by the borrower at the time of a loan transaction, indicating the costs, expenses and deductions of a loan which has been negotiated by a licensee.
BUILDING CODE: A state, city or county law which sets forth minimum construction standards.
BUILDING LOAN: Also known as construction loan. A variation on the mortgage whereby the lender lends money to a developer or builder with advances of funds at each state of completion. The land itself and that which has been completed serves as collateral.
BUILDING RESIDUAL TECHNIQUE: Method of appraising an income producing building separate from the land, or determining accrued depreciation of same.
BUILDING RESTRICTION LINE: A required set-back a certain distance from the road within which no building may take place. This restriction may appear in the original plat of subdivision, restrictive covenants or by building codes and zoning ordinances.
BULK SALES LAW: Division 6 of the "Uniform Commercial Code" that regulates the sale of inventory of a business for the protection of the seller's creditors and the buyers.
BUNDLE OF RIGHTS: The rights or interests that a person has in a thing; the exclusive right of a person to own, possess, use, enjoy and dispose of real or personal property. The ownership of property.
BUSINESS AND PROFESSIONS CODE: The title of the book of laws which contains the provisions of the California Real Estate Law and other state licensing laws.
BUSINESS OPPORTUNITY: Real Estate Law defines "business opportunity"
as meaning and including the sale or lease of the business and goodwill
of an existing business enterprise.
BUY DOWN: Is an artificial subsidy paid by someone (seller, builder, relative, purchaser, etc.) to provide a lower interest rate for the borrower.
BUYER'S MARKET: Several properties for sale with few buyers.
CALLED LOAN: A loan that is due and payable at the demand of the lender, usually as a result of an acceleration or alienation clause becoming effective.
CAL-VET: Loans made by the California Department of Veterans Affairs.
CAPACITY: The legal ability of a person to perform certain civil acts.
CAPITAL EXPENDITURES: Investments of cash or the creation of liability incurred for additions or betterment; usually land, buildings, machinery, and equipment.
CAPITAL GAIN: The gain received on the sale of real or personal property, other than property sold as stock-in-trade.
CAPITALIZATION: In appraising, determining value of property by considering net income and a percentage of reasonable return on the investment. The conversion of income into value.
CAPITALIZATION RATE: Any rate used to capitalize income. A percentage relationship between capital and net income.
CASH BACK: Any Real Estate transaction where there is more than 100% financing (like the financing of a car rebate) but this time the buyer has no intention of making even one payment. He takes the rebate l0, 20, 50, l00% and walks (or runs) leaving the seller who carried paper and subordinated with a loan that's secured by only blue sky. Now on the other hand, creative financing of up to l00% has it's place. It couldn't be all bad or our government wouldn't insure that every veteran can have l00% no down V.A. loans thru the G.I. Bill if they can qualify.
CASH DISBURSEMENTS JOURNAL: A record of all cash payments.
CASH FLOW: The pre-tax income from an investment after deducting from gross income, all operating expenses and loan payments. Loan payments include both interest and principal. The after-tax income may be referred to as "net spendable cash flow."
CASH RECEIPTS JOURNAL: A record of all funds received.
CAVEAT EMPTOR: Buyer beware. The buyer must inspect the property and satisfy himself it is adequate for his needs. The seller is under no obligation to disclose defects but may not actively conceal a known defect or lie if asked.
CC&R;'s: Covenants, conditions, and restrictions. The basic rules establishing the rights and obligations of owners of real property within a subdivision or other tract of land in relation to other owners within the same subdivision or tract and in relation to an association of owners organized for the purpose of operating and maintaining property commonly owned by the individual owners.
CERTIFICATE OF ELIGIBILITY: The document given to qualified veterans which entitles them to VA guaranteed loans for homes and businesses. Certificates may be obtained by sending the veteran's separation papers (DD-214) to the local VA office with a request form (VA 1880) completed by the veteran.
CERTIFICATE OF REASONABLE VALUE (CRV): A document issued by the Veterans Administration which acts as an appraisal, showing the property's current value.
CERTIFICATE OF SATISFACTION: A document signed by the Noteholder and recorded in the land records evidencing release of a DEED OF TRUST, MORTGAGE or other lien on the property.
CERTIFICATE OF TITLE A written opinion by an attorney setting forth the status of title to the property as shown on the public records. The certificate does not certify as to matters not of record and affords no protection unless the author was negligent. Compare, TITLE INSURANCE.
CERTIFICATE OF VETERAN STATUS: The document given to veterans or reservists who have served a minimum of 90 days of continuous active duty (including training time). This form may be obtained by sending form DD-214 (separation papers) to a local VA office with a request form (VA 26-8261/a). This document allows reservists or veterans to obtain lower down payment FHA loans.
CHAIN OF TITLE: The series of transactions from GRANTOR to GRANTEE as evidenced in the land records.
CLIENT: A person or firm receiving the professional services of a broker, or the party applying for a loan.
CLOSING: The act of concluding the sale of real estate by exchange of a deed in return for other considerations. (The signing of legal documents necessary to convey the property.)
CO-BROKER: A name used in describing a person who finds prospects for the broker, and is usually paid a finder's fee for his information.
COINSURANCE: When more than one insurance company shares the risk of a particular transaction or series of transactions. Lenders may require co-insurance on large commercial projects.
COLLATERAL: Property pledged to secure a loan.
COMMERCIAL BANKS: Local state and national banks which provide the primary source for construction financing. Many also loan money for permanent mortgages on housing.
COMMITMENT: A promise by a lender to make a loan with specific terms or conditions to a borrower or homebuilder. Also a promise by an investor to purchase mortgages from a lender with specific terms or conditions.
COMMITMENT FEE: An up front charge paid to bind an agreement to lend an amount of money at a specific interest rate.
COMPARABLES (COMPS): Recently sold properties that are similar to the property being valued. These comparables are used and compared to a specific property to indicate its market value by the market data approach.
COMPOUND INTEREST: Interest paid upon the total of principal plus unpaid
interest that has accumulated.
CONDEMNATION: Taking of private property for a public use through exercise of the power of EMINENT DOMAIN. The Constitution protects against taking without fair compensation.
CONDOMINIUM: A system of individual FEE SIMPLE ownership of portions (units) in a multi-unit structure, combined with joint ownership of common areas. Each individual may sell or encumber his own unit. Compare, COOPERATIVE.
CONSERVATOR: Also called a Commitee or Guardian, a person designated by the Court to protect and preserve the property of someone who is not able to manage their own affairs. Examples include the mentally incompetent, minors and incarcerated persons.
CONSTRUCTION LOAN (INTERIM LOAN): A temporary loan to provide funds necessary to begin construction on buildings or homes.
CONTRACT FOR SALE OR DEED: A written contract to purchase between a buyer and seller of real estate. Once the conditions of the contract have been fulfilled, the seller will convey title of the property to the purchaser.
CONVENTIONAL LOAN: A mortgage loan made by an institutional lender without government guarantees such as VA or FHA loans. The lender relies solely on the credit of the borrower and the security of the real property to secure payment of the debt.
CONVERSION OPTION: The right for the borrower for a fee, to convert an adjustable rate mortgage into a fixed rate mortgage within a specific period of time.
COOPERATIVE: A system of individual ownership of stock in a corporation that in turn, owns the structure. Each owner has an exclusive right to use his individual unit and must pay his portion of the debt encumbering the entire building. Compare, CONDOMINIUM.
CORPORATION: A legal entity created to conduct business with essentially the same rights as individuals. The corporation has continuous existence until dissolved through legal proceedings.
COTENANCY: Ownership in the same land by more than one person. See, TENANTS IN COMMON, JOINT TENANTS, TENANTS BY THE ENTIRETY.
COVENANT: A written agreement or restriction on the use of land or promising certain acts. Homeowner Associations often enforce restrictive covenants governing architectural controls and maintenance responsibilities. However, land could be subject to restrictive covenants even if there is no homeowner's association.
CREATIVE FINANCING: When institutional financing such as traditional loans or alternative financing does not solve the home purchasing problem, another party such as the seller or an investor may provide non-institutional financing. This non-institutional financing may be very "creative" as the seller does not have to follow the same stringent lending rules institutional lenders must follow.
CURRENT INDEX: The current value of a recognized index as calculated and published nationally or regionally. The current index changes periodically and is used in calculating the new note rate at each adjustment period.
DEED: A written document under which an owner of real estate transfers title, or ownership of land to a buyer or to any other person, who then holds conditional title on behalf of the lender or note holder.
DEED OF TRUST: A security instrument used to transfer property to a trustee. Some states use a deed of trust while other use a mortgage as security for a mortgage loan.
DEFERRED INTEREST MORTGAGE: A mortgage in which the payment is not sufficient to pay the principal and the interest. The interest is deferred and will be paid at a later date.
DEFAULT: The failure of a duty or obligation, such as the failure to make the required payments called for in a mortgage note. Loan default may cause foreclosure.
DEFICIENCY JUDGMENT: If the foreclosure sale does not bring sufficient proceeds to pay the costs of sale and the note in full, the holder of the note may obtain a judgment against the maker for the difference.
DELIVERY: The final, unconditional and absolute transfer of a DEED to the Grantee so that the Grantor may not revoke it. A deed, signed but held by the Grantor, does not pass title.
DISCOUNT BUY DOWN: The paying of discount points to reduce the interest rate temporarily or permanently for a home purchaser.
DISCOUNT POINTS: A device used to equalize interest rate yields for lenders and investors. Each discount point is equal to one percent of the loan amount. Each discount point paid on a 30 year fixed rate mortgage increases the lenders yield by approximately one-fifth of a percent in interest.
DISINTERMEDIATION: That condition that occurs when funds are leaving savings institutions at a faster rate than funds are coming in.
DOWER: A spouse's interest in the property of a deceased spouse.
DRAW SYSTEM: A payment installment of loan proceeds from a lender to a borrower based on some predetermined increment of the total construction proposed being completed. Sheetrock draw, roof sheeting draw, etc.
Department of Real Estate.
DUE ON SALE CLAUSE: A clause in the DEED OF TRUST or MORTGAGE that makes the loan non-assumable by providing the noteholder may call the loan immediately due and payable upon a sale or conveyance of an interest in the property. The FNMA/FHLMC form provides that a lease of more than three years or a lease with an option to buy also triggers this provision.
EASEMENT: The right or interest one person has in another's land.
EMINENT DOMAIN: The power of the state to take private property for public use upon payment of just compensation.
ENCROACHMENT: The physical intrusion of a structure or improvement on the land of another. Examples include a fence or driveway over the property line.
ENCUMBRANCE: Any lien, liability or charge against a property.
ENTITLEMENT: The VA home loan benefit given to qualified veterans which is used to guarantee a VA home or business loan.
EQUITY: The value a property owner has in real estate once the obligations and costs of selling are deducted.
EQUITY PARTICIPATION: An investor or lender may offer lower interest rates to a borrower in return for sharing in the appreciation or expected equity gain. This concept is very common in commercial real estate.
EQUITY SHARING: Any two or more purchasers that wish to purchase real estate together can divide the property's appreciation or equity. A lender or investor can offer a lower interest rate in return for a share of anticipated equity.
ESCHEAT: Property that reverts to the state when an individual dies without heirs and without a will.
ESCROW: A disinterested third party holds funds or documents on behalf of others and subject to their instructions.
ESCROW ACCOUNT: Funds which are set aside and held in trust by a third party, usually to pay taxes and insurance on real estate.
EXAMINATION OF TITLE: The interpretation of the record title to real property based on the title search or abstract.
EXECUTOR: A person named in a will to carry out its terms and administer the estate. The feminine form is Executrix. Compare, ADMINISTRATOR.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): An affiliate of the Federal Home loan Bank which creates a secondary money market in conventional residential loans and in FHA and VA loans by purchasing mortgage loans from members of the Federal Reserve System and the Federal Home Loan Bank Systems.
FEE SIMPLE: The absolute total interest in real property. Compare, LIFE ESTATE, REVERSION.
FHA: Federal Housing Administration, a department of Housing and Urban Development which insures FHA mortgage loans.
FHLMC: Federal Home Loan Mortgage Corporation (Freddie Mac) is a quasi government body to provide a secondary mortgage market so that an adequate supply of mortgage money is available for home purchases.
FINANCING STATEMENT: Lenders record financing statements to evidence personal property, such as a new furnace, siding or windows, is subject to a lien.
FIXTURE: An item of personal property attached to real property so that it can not be removed without damage to the real property. A FIXTURE becomes part of the real property.
FIRM COMMITMENT: A promise from a lender to make a mortgage loan with specific terms. A promise by FHA to insure a mortgage for a specific property and purchaser.
FIRST MORTGAGE: The first recorded or senior mortgage.
FIXED RATE MORTGAGE (FRM): A mortgage loan which would have a fixed interest rate and a fixed payment for the entire term of the loan for the original borrower.
FMHA: Farmers Home Administration is a federal government agency which guarantees loans on farms and businesses in rural areas of the United States.
FNMA: Federal National Mortgage Association (Fannie Mae) is a quasi government body to provide a secondary mortgage market, so that an adequate supply of mortgage money is available for home purchases.
FORECLOSURE: A legal process by which the lender or seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage.
FULLY INDEXED NOTE RATE: The index plus the lenders gross profit margin.
If the index is 10% and the lenders profit margin is 2%, the fully indexed
note rate would be 12%.
FORECLOSURE: The process by which a lender sells property securing a loan in order to repay the loan. Under a DEED OF TRUST, foreclosure is by public auction after appropriate advertisement. A MORTGAGE may require the lender to obtain Court approval prior to sale.
GENERAL WARRANTY DEED: The Grantor warrants title against all claims.
GNMA: Government National Mortgage Association (Ginnie Mae), an agency of HUD designed to attract capital into the mortgage markets and provide a secondary mortgage market for the sale of VA and FHA mortgages.
GRADUATED PAYMENT MORTGAGE (GPM): A mortgage that usually starts the borrower with low payments which are gradually increased over 5-10 years, until the loan is fully amortized. Negative amortization usually occurs until the payment reaches the level payment stage. Usually government insured loans (VA or FHA).
GRADUATED PAYMENT ADJUSTABLE RATE MORTGAGE (GPARM): A conventional mortgage that would start the borrower out with low payments which are gradually increased over 3-6 years, until the loan is fully amortized. Negative amortization usually occurs until the payment reaches the level payment stage.
GRANTEE: The person receiving an interest in property. Compare, GRANTOR
GRANTOR: The person granting, selling or giving up an interest in property. Compare, GRANTEE.
GROSS MARGIN (PROFIT MARGIN): This is the lenders profit margin on adjustable rate mortgages. This profit margin is usually in the 2%-3% range and when added to the index rate equals the full note rate. If the gross margin is 2% and the index rate is 10%, the note rate would be 12%
GROUND LEASE: The owner grants a long term lease of the land (usually 99 years) and allows the lessee to build and use the land as agreed. At the end of the term, the land and all improvements revert to the owner.
GROWING EQUITY MORTGAGE (GEM): This is a long term mortgage whereby the borrower agrees to increase his payment each year by an agree amount. The extra payments are applied to the loan principal, which in turn would pay off the mortgage in 12-16 years.
GUARDIAN: One appointed by the Court to administer the affairs of a minor. A guardian ad litem is appointed to protect one's interest in a particular legal action. See, CONSERVATOR.
HAZARD INSURANCE: Also called homeowners insurance, it is insurance to cover losses due to fire, wind, vandalism, theft, etc.
HIATUS: A gap or space left between two parcels of land and not included in the legal description of either parcel. Similar terms are Gaps and Gores.
HOMESTEAD DEED: A declaration filed in the land records that an individual is asserting his homestead exemption. That exemption allows one to protect some assets (amount varies by state) against the claims of creditors.
HYPOTHECATE: To pledge a thing as security without having to give up possession of it.
INDEMNITY: A protection against actual loss or damage as a result of the matter mentioned. An indemnity is not an absolute guarantee that something won't happen, it states the terms under which an actual loss will be compensated.
INDEX: The measuring device used to determine if interest rates have gone up or down over time. A wide variety of indexes may be used with adjustable rate mortgages.
INGRESS AND EGRESS: Applied to EASEMENTS, meaning the right to go in and out over a piece of property but not the right to park on it.
INITIAL NOTE RATE: The mortgage note rate at the inception of the mortgage. This rate will change periodically according to the index.
INSURABLE TITLE: Title subject to a defect or claim which a title insurance company is willing to insure against. Compare, MARKETABLE TITLE.
INSURED CLOSING LETTER: An Indemnity given to a lender from a title insurance company, agreeing to be responsible if the closing agent does not follow the lender's instructions or misappropriates the loan proceeds. Lender's usually require an insured closing letter be on file for each settlement.
INTEREST: The cost paid by a borrower for the use of funds which he borrows.
INTEREST CAP: A consumer protection which limits the amount of interest that a loan may be increased or decreased. Yearly interest caps and life of loan caps are available with many loans today.
INTEREST RATE BUY DOWN: The payment of money to a lender to reduce the borrower's interest rate either temporarily or permanently. This would help reduce the buyer's payments and help him qualify for the loan.
INTERIM FINANCING: A temporary construction loan made during the completion of a home or building, which is usually replaced by a permanent loan after completion and/or sale of the property.
INTESTATE: An estate without a Will. Compare, TESTATE
JOINT OWNERSHIP AGREEMENT: An agreement between owners defining their rights, ownership, monetary obligations and responsibilities. This could be between and investor and an occupant or the occupants. If an investor is involved, the investor does not take depreciation deductions and none of the occupant's payment is deemed rent for tax purposes. Compare, EQUITY SHARING.
JOINT TENANTS: Two or more persons own a property. Joint tenants with the common law right of survivorship means the survivor inherits the property without reference to the decedent's will. Creditors may sue to have the property divided to settle claims against one of the owners. Compare, TENANTS IN COMMON, TENANTS BY THE ENTIRETY.
JUDGMENT LIEN: A judgment is a lien against all real property owned by the judgment debtor in the county where the judgment is docketed (recorded).
JUNIOR MORTGAGE: A secondary mortgage which is subordinate to the first
mortgage, or a third which is subordinate to the second.
LAND CONTRACT: See CONTRACT FOR DEED.
LIEN: A charge against a property similar to a mortgage. A security instrument for repayment of a debt owed.
LIENOR: Beneficiary who has a right of lien upon a property of another.
LIFE ESTATE: The right to use, occupy and own for the life of an individual. Compare, FEE SIMPLE.
LIFE OF LOAN CAP: A cap which covers the entire life or term of the loan. A typical life of the loan in use today, would be a 5% interest rate cap.
LOAN COMMITMENT: A pledge from an investor to make a loan at a future date and sometimes after certain conditions have been fulfilled.
LOAN TO VALUE RATIO: The relationship between the mortgage loan and the appraised value of the property, expressed as a percentage. A 90% conventional loan has a 90% loan to value ratio.
MAJORITY: The age at which a person may handle his own affairs.
MARKETABLE TITLE: A good title about which there is no fair or reasonable doubt; title which is reasonably free and clear of encumbrances and clouds so as to be acceptable to the typical buyer.
MARKET PRICE: The actual price paid in a market transaction; a historical fact.
MARKET VALUE: The value of a property determined by comparable sales, or the actual sale price. Market value is defined as the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably, and assuming the price is not effected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: 1. Buyer and seller are typically motivated; 2. Both parties are well informed or well advised, and each acting in what he considers his own best interest; 3. A reasonable time is allowed for exposure in the open market; 4. Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto, and; 5. The price reflects the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Adjustments to the comparable must be made for special or creative financing or cost concessions. No adjustments are necessary for those costs that are normally paid by sellers as a result of traditions or law in a market area; those costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing concession, but the dollar amount for any adjustment should approximate the markets reaction to the financing or concessions based upon the appraiser's judgement.
MECHANICS LIEN: A lien placed on a property as security for payment for work performed in the construction of the property.
METES AND BOUNDS: A means of describing land by directions and distances rather than reference to a lot number. Generally used when land has not been subdivided into lots.
MORTGAGE: A contract between a lender and a borrower under which real estate is given as security by the borrower to the lender in return for the loan to buy the home.
MORTGAGE BANKERS: Individual lenders who make mortgage loans from borrowed funds and then sell the loans to investors, usually mortgage companies as opposed to savings and loans or banks. The traditional VA-FHA lenders.
MORTGAGEE (LENDER): The lender of money for the purchase of real estate. One who holds a mortgage on real estate.
MORTGAGE INFORMATION LETTER (MIL): A letter issued by the lender which indicates the payoff balance of a loan as well as any other requirements of loan payoff.
MORTGAGE INSURANCE PREMIUM (M.I.P.): Mortgage insurance premium is required on FHA loan. M.I.P. is paid by the borrower and insures that lenders making FHA loans will be covered against foreclosure losses.
MORTGAGOR: The borrower of money to purchase real estate.
NEGATIVE AMORTIZATION: The opposite of amortization, the loan balance goes up instead of down, until the payments reach a fully amortizing level. Also referred to as deferred interest.
NEGATIVE CASH FLOW: When the rental income on investment property does not cover the mortgage payments, taxes, insurance, maintenance and other costs of the investment.
NOTARY PUBLIC: One authorized by law to acknowledge and certify documents and signatures.
NOTE: The signed obligation to repay a debt, as a mortgage note.
NOTE RATE: The interest rate that must be paid back on the mortgage note in addition to the principal amount owed.
ORIGINATION FEE: The fee charged by a lender for processing a loan application. It usually amounts to 1% of the loan applied for.
OVERALL INTEREST CAP: Same as life of the loan cap. A stated amount limiting increases or decreases in interest over the life of the loan.
PAPER: Equity dollars lent against property, usually "carried back", or financing provided by the seller of a property.
PARTITION: The forced division of land among parties who were formerly co-owners. A partition suit may ask to divide the land or if that is not practical, sell the land and divide the proceeds.
PAYMENT ADJUSTMENT PERIOD: This is the time frame between payment adjustments made on adjustable rate mortgages. Usually 1, 3 or 5 years.
PAYMENT CAP: A cap placed on the borrower's payment rather than his interest rate. A typical payment cap used today would be 7 1/2% of the payment. (Roughly equivalent to 1% in interest.)
PAYMENT RATE: The effective rate of interest the buyer is paying at a certain time, regardless of the overall interest rate of the note.
PERMANENT BUY DOWN: An amount of money paid to a lender to permanently reduce a borrower's interest rate and payments.
PERMANENT LOAN: A long term mortgage of 10 years or more. Also called an "end loan."
PIPESTEM LOT: A lot connected to a public street by a narrow strip of land. Usually several adjacent pipestems are combined to form one driveway with each owner having a mutual-reciprocal easement to use and maintain the driveway to the street.
PLAT: A map showing the division of piece of land with lots, streets and, if applicable, common area.
PLEDGED ACCOUNT BUY DOWN: A buy down that uses a principal amount paid plus interest earned on the principal to reduce a borrower's interest rate and payment.
POINTS: A charge equal to 1% of the loan amount which increases or equalizes the lenders yield or rate of return. Each discount point is worth roughly one-fifth of a percent in interest on a 30 year fixed loan.
POLICY: A written contract of title insurance.
POWER OF ATTORNEY: A written document authorizing another to act on his behalf as an ATTORNEY IN FACT. One does not need to be a licensed attorney to act as an attorney in fact but, power of attorney forms are powerful legal documents that should be used only under advice of a licensed attorney at law.
PREPAYMENT PENALTY: The amount set by a creditor to be paid by the debtor if he repays the total amount of the debt prior to maturity.
PREPAYMENT PRIVILEGE: The right of a borrower to pay off a loan before the maturity date, without incurring a penalty.
PRIMARY MORTGAGE MARKET: Lenders who make mortgage loans directly to borrowers. Examples are savings and loans, commercial banks and mortgage companies. These lenders may sell their loans to the secondary mortgage market such as FNMA, FHLMC and GNMA.
PRINCIPAL: The amount of the mortgage debt which is presently owed.
PRIVATE MORTGAGE INSURANCE: Similar to FHA's mortgage insurance premium but it is provided by private insurance companies to lenders making conventional loans with less than 20% down. It protects lenders against foreclosure losses.
PROCEEDS BUY DOWN: A buy down which the seller or builder pays from his proceeds to give a buyer a lower interest rate and payment.
PROMISSORY NOTE: A written promise to pay or repay a certain amount of money at a certain time, or in certain installments, or on demand.
PROTECTIVE EQUITY: The difference between the market value of the property and the total indebtedness of loans senior to your loan, but does not include loans junior to your loan.
QUIET TITLE: A suit brought to remove a claim or objection on title.
QUITCLAIM DEED: The deeding or giving up one's interest in a property to another party.
RAPID PAYOFF MORTGAGE (RPM): A fancy name for a short term mortgage. Usually a 15 year fully amortized mortgage.
REFINANCE: Obtaining a new mortgage loan on property already owned, often to replace existing loans on the property.
RESISSUE RATE: A discounted rate for title insurance when the title
was previously insured with an owner's title insurance policy issued within
the last ten years.
REMAINDER: An interest in land that is postponed until the termination of some other interest such as a LIFE ESTATE. Compare, FEE SIMPLE.
RENEGOTIABLE RATE MORTGAGE (RRM): Similar to an adjustable rate mortgage when the interest rate and payments can be adjusted periodically to an index.
RESIDENTIAL LOANS: Home loans.
REVERSE ANNUITY MORTGAGE (RAM): A mortgage where the properties equity is used to give the homeowner a monthly income.
REVERSION: A provision in a conveyance that the land will return to the grantor upon the happening of an event or contingency. Compare, FEE SIMPLE.
RIPARIAN RIGHTS: The rights of an owner of land adjacent to water.
ROLLOVER MORTGAGE (ROM): A mortgage where the payments are only guaranteed for 3, 4 or 5 years. The payments would be renewed for successive terms according to prevailing interest rates.
SATISFACTION OF MORTGAGE: Also called a "release of mortgage," a document issued by the lender when the mortgage is paid in full.
SAVINGS AND LOANS: The traditional lenders for conventional home loans.
SECOND MORTGAGE: A mortgage which is recorded after a first mortgage is already recorded. The second mortgage is subordinate to the first mortgage.
SECONDARY MORTGAGE MARKET: A place that the primary lenders can sell their mortgages to obtain more funds to make additional loans. The secondary market consists of FHLMC, FNMA, GNMA and several private firms such as GECC and Sears Financial.
SHARED APPRECIATION MORTGAGE (SAM): Similar to shared equity mortgages. Two or more parties participate in the purchase of real estate and share the appreciation and tax deduction.
SPECIAL WARRANTY DEED: The seller warrants he has done nothing to impair title but makes no warranty before his ownership. Compare, GENERAL WARRANTY DEED and QUITCLAIM DEED.
STATUTE OF LIMITATIONS: The time period to file a law suit to enforce a claim or it is barred by law.
SUBDIVISION: Dividing land into lots and streets. The owner signs a PLAT and Deed of Resubdivision which is recorded among the land records. The state and county have strict requirements for subdivision of land.
SUBJECT TO: Taking title to property with a lien but not agreeing to be personally responsible for the lien. If the holder who forecloses the lien can take the property but may not collect any money from the owner who took "subject to." Compare, ASSUMPTION.
SUBORDINATION: To take a lesser position than one did have.
SWEAT EQUITY: When a purchaser performs work or services on the property he intends to purchase, equity may be earned by the purchaser.
TENANTS BY THE ENTIRETY: A husband and wife own the property with the common law right of survivorship so, if one dies, the other automatically inherits. One may not sue the other to PARTITION the property. A creditor of one may not claim the property or the proceeds of sale. Compare, TENANT IN COMMON, JOINT TENANTS.
TENANTS IN COMMON: Two or more persons own the property with no right of survivorship. If one dies, his interest passes to his heirs, not necessarily the co-owner. Either party, or a creditor of one, may sue to PARTITION the property. Compare, TENANTS BY THE ENTIRETY, JOINT TENANTS.
TESTATE: To die with a Will. Compare, INTESTATE.
TESTATOR: One who makes out a last will and testament. The feminine form is Testatrix.
TITLE: The right of ownership to property.
TITLE INSURANCE: Insurance issued to owner of real estate to protect them against claims arising by reason of defects in the title to the property.
TITLE SEARCH: A title search is an investigation of public records, laws and court decisions to disclose the current facts regarding ownership of real estate which determines ownership.
TRUST: A property right held by one for the benefit of another.
TRUST ACCOUNT: A bank account separate and apart and physically segregated from a broker's own funds, in which the broker is required by state law to deposit all money collected for clients; sometimes called escrow account.
TRUSTEE: One who holds property in Trust for another.
TRUTH-IN-LENDING LAW: A federal law with the purpose of providing that borrowers can receive information regarding the cost of credit in such a way that they can compare various credit terms. The law requires that all finance charges and interest rates which make up the annual percentage rate be disclosed to the borrower.
USURY: Interest charged in excess of the legal rate established by law.
VA LOAN: A mortgage loan made to a qualified veteran and guaranteed by the Veterans Administration. The "loan guarantee" is to the private lender making the loan, to protect them against foreclosure losses.
VOUCHER SYSTEM: Much like draws but more detailed than the draw system. Vouchers are almost like checks pre-written for every item in the course of construction of a new home. Once work is verified, the voucher is redeemable for money from the construction lender.
WAREHOUSE FEE: Many mortgage firms borrow funds on a short term basis in order to originate loans which will later be sold in the secondary mortgage market. When the rate of interest is higher on short term loans than on long term mortgage loans, the lender has an economic loss. This loss is offset by changing a warehouse fee.
WRAPAROUND MORTGAGE: A new larger mortgage is created which would encompass the first mortgage. This large second mortgage is used to preserve the low interest rate on the first mortgage for a potential buyer.
YIELD: A return on an investment, which includes the interest rate charged, discount points paid and any other charges collected.
REAL ESTATE LOAN BROKER
P.O. Box 163, Cedar Ridge, California 95924
Safer Trust Deed Investing
designed by Brad Evans, ©1996 Brad Evans
To better develop harmony in our investor/broker relationship, I feel that a draft of what I would like from you is important. I want to do whatever I can to improve our services for you. I want to clarify what our free service consists of and what you can expect from us as well as what you may expect from your Trust Deed investments. I have included an explanation of what our service offers you as an investor. Keep in mind that I am open to and interested in your reaction, suggestions and input.
Please initial items #3, 6, 9, 13, 15, and 16, and then sign the back page and return it to me.
1) Please call about placing only those funds you actually have available (in your possession) to invest so that I can put your name in line on the "FUNDS AVAILABLE BOARD". Sometimes when you call I may even be able work out a commitment with you right then. Committing to a loan when you're "Going to" have funds or "Expect to" have funds sometime in the near future can create major problems if you can't perform on your commitment. When you make a verbal commitment please plan to stick by it. Lenders making loan commitments that they later cannot keep for whatever reason can be very costly and frustrating. I need to be able to depend on your commitment. If subsequently a loan you have committed to seems to be taking too long to close escrow (over two weeks) call me again and I can sometimes start your interest clock early or even shift you to another spot if necessary.
2) Please try to avoid contact with your borrowers. On numerous occasions borrowers have become a nuisance to lenders who disclosed their home phone numbers or street addresses. (One borrower decided to tear down the house he was supposed to remodel and later said the lender told him to. Another borrower misunderstood an investor to say he didn't have to make his payments for awhile!) I strongly suggest you obtain a P.O. Box. Without a P.O. Box you've automatically put us, as well as the title company, in the position of having only your street address to give out to borrowers. Set good ground rules by immediately referring ALL borrower telephone calls and requests promptly and directly to our office the very first time they call to best avoid letting yourself in for much nuisance and aggravation!
X 3) The bank will automatically call us about any late monthly payments when they are one day past the grace period. Our office will then send our standard "nasty" 30 day late notice. If subsequently 2 payments both become past due (the moment any borrower becomes a total of two months and 11 days behind) we will send a "Notice of Intent to File" on a given date (usually the 16th of the month the second payment is not made). You will receive a copy of each of these two notices. Please don't call us about outstanding late charges owed you, we can no longer enforce collection of late charges legally. Instead, please keep track of any late charges owed you and add them to your demand total at the time of payoff. Those investors who choose to collect payments and service loans themselves, CALL US IMMEDIATELY if a borrower gets two months behind, we can guide you through the process of filing the required notice of default against that delinquent borrower. We have no way of knowing if a borrower is delinquent unless you tell us.
4) With respect to all borrowers who do subsequently fall behind on monthly payments please agree that as a Brad Evans investor you will cooperate with our standard practice requiring lenders file notices of default on borrowers only after they have fallen a full 2 (two) months behind, including the full grace period. Not sooner and not later PLEASE! Taking delicate foreclosure matters into your own hands or filing a foreclosure early or filing on borrowers unnecessarily cannot be allowed. An improperly executed foreclosure can later present more problems for you than it could ever be worth!
5) Please ask all borrowers who contact you "directly" for free extensions and other favors to please call me directly about whatever they need. As your Broker I am always prepared to handle most everything for you the right way and at no cost to you whatsoever, so why would you want to take a big chance with your investment just to save a bargain hunting borrower a few of your bucks? Don't ever attempt to extend, re-write or modify a Brad Evans Real Estate loan yourself. Doing this not only voids the Brad Evans Loan Promise but is dangerous and worse yet, any illegal extension benefits a borrower did convince you to accept could later result in finding yourself guilty of usury (and without properly updated title coverage, the recording of proper modification agreements and documents, and subsequent new lien protection, and all for nothing except saving the borrower some fees). If you attempt to alter, modify, or extend a note and Deed of Trust yourself, not only is there NOTHING IN IT FOR YOU, but you also will be without:
X 6) CAUTION!! LACK OF FIRE INSURANCE COVERAGE POSES THE SINGLE
GREATEST REAL ONGOING THREAT TO YOUR TRUST DEED INVESTMENTS. Always notify us immediately if you receive a fire insurance policy cancellation or expiration notice. I will put pressure on the borrower and threaten foreclosure if necessary. If he does not pay the premium, it is still ALWAYS your responsibility to follow up, even to the point of buying a lenders policy for yourself prior to the previous policy's cancellation. You'll have the legal right to file a notice of default if you have to, to get reimbursed. I have seen two homes with our loans on them burn to the ground and both times investors were covered in full with no problem because of this very important practice. (On fractionalized notes, the investor holding the largest portion of the note would be required to advance the premium amount necessary to cover any unpaid fire coverage and would be reimbursed later.)
7) Expect an additional one to two week delay of your monthly payments on all bank serviced loans. That is a part of the trade-off for the privilege of earning high interest. If you can't accept this delay caused by loan servicing, you can choose to service your own loans. Also, at the time of payoff, if you have still been unable to collect an old late charge or check charge, etc., it can always be added by you to your final demand for payoff along with any other outstanding fees.
8) I truly enjoy sharing Safe Trust Deed investing with those investors who are pleasant and cheerful to work with. Disgruntled, rude, impatient or demanding investors should try to remember that you and I are both on the same ball team. You absolutely would not believe how rude some investors have been over relatively nothing in the course of enjoying this FREE service! I find myself giving a little more priority to cheerful, polite, professional and respectful people that I enjoy working with.
X 9) I can't guarantee your investment against all problems, delays, occasional snags and borrowers who pay late. The Commissioner of Corporations requires that I advise you consider not putting any more than approximately 10% of your total Trust Deed investment portfolio into any one single Trust Deed investment. National statistics show that approximately 1 in every 100 borrowers will file bankruptcy which can result in as much as a six to twelve month interruption in monthly payments to you on that loan. If you are depending on Trust Deeds for regular monthly income, I recommend diversifying into as many smaller pieces or fractionalized loans as you can. Dividing the amount you have into ten pieces might be a good rule of thumb. If a borrower does file bankruptcy, your interest clock will still continue to click and there should ultimately still be no costs to you.
10) Be realistic. If a borrower had flawless credit and a million dollars in the bank, he probably wouldn't agree to pay you such high interest. In exchange for earning high interest we've agreed to hang our hat or look to secure our investments primarily on real estate equity. The reasoning behind this practice of `equity' lending is though you may suffer headaches, delays and some minor problems, you'll always have nearly 2 to 1 in ample security based on the real estate equity. Expect snags, expect delays and expect late payments from time to time. It's no secret that Trust Deeds are simply just not for everyone. You and I usually pay our bills on time, while some borrowers may choose not to. That alone doesn't make that particular investment a bad risk as long as you have ample security in real estate equity as collateral backing you up. (Late charges collected can actually raise your yield considerably). Some headache is the price you must accept in exchange for earning high interest. One investor (depending on his interest for his monthly income) pays himself with his own funds on the first of each month and later subsequently replaces the funds when the borrowers payments arrive.
11) Please let us know if you plan to be out of town for more than 3-4 business days. Not being able to reach you can create a serious problem, kill a deal or even cause a lawsuit. You can be sued for not providing a payoff demand within 20-25 business days of a request for payoff. Imagine if a borrower's new loan commitment expires or rates go up. If he is damaged in any way by a lender's inability to provide a demand within 30 days look at what even a 1/2% interest rate increase he might suffer could add up to on his new 30 yr. loan commitment that he could not close till your demand gets to his title co!
12) Answering machines, (yes, we all hate them....but...). If you don't already have one you may want to consider getting one now. Time is money and if someone can't reach you or communicate with you, you are probably going to be the one who will be missing out. I feel that an answering machine should be a prerequisite for all Safer Trust Deed investors. Other helpful tools for those who expect to do a higher volume of investing might be: Definitely a FAX MACHINE on a dedicated line! (Fax sharing a tel line defeats the purpose if someone has to make contact with you by phone in order to send you a fax. Call waiting, a service provided by the phone company where callers can get through to you even if you're already on the telephone when they call. E-Mail is available to anyone who has a home computer of any kind now and I would be happy to show you how to "GET ON LINE" with E-Mail. (Believe it or not it's offered for free by many services such as America Online. When I try to call lenders and get a continuous busy signal, I'll usually call the next lender in line rather than continuing to redial a busy number over and over again. Fax machines provide the fastest, easiest and most convenient way for me to communicate with you over telephone lines. Electricity moves a lot faster than the post office. A small home computer can help innovative or the more aggressive investors get services from us not available elsewhere. For example, investors with a computer and a modem can now call my computer systems "FTP" site and see what is available and read all my booklets (like "Stocks -vs- TD's", where to set up a pension plan administrator, read actual lender fliers, and dozens of other items FREE) soon you can even put a hold on any Trust Deeds you may want before they are offered by mail.
X 13) IT IS YOUR RESPONSIBILITY to always send a 90 day
notice of balloon to every borrower by certificate of mailing only,
NOT certified, NOT return receipt requested. I put the instructions on
the bottom of the 90 day notice form and offer free copies for your use
upon request. Section 2924i of the California civil code requires that
you send this notice to borrowers on all owner occupied loans and I require
that you send this notice on all loans. It is a good idea and a good habit
to develop as an investor. (This document as well as all of our others
can be viewed and printed from your home computer by using any internet
browser (America Online, NETSCAPE etc) and going to:
14) Don't take matters into your own hands or become emotional over investments; life is much too short. Exercise a little patience. If you have any problems whatsoever call us and we'll be happy to handle them for you. We are here for you and someone is usually always available 9:30 to 5, Monday through Friday (except maybe Dec. 23rd to Jan. 2nd; and 2 weeks during the summer each year, oh and lunch time).
X 15) At the time of payoff it is your responsibility to accurately
fill out and promptly
return any demand for payoff (reconveyance). Keep track of where you sent your original documents to be paid off so that later if no payoff occurs, you'll know where you sent those original documents. Sometimes a payoff doesn't go through and later you will need to get your original note and Trust Deed back; you may find it hard to remember exactly where you sent your original documents. NEVER ACCEPT A PAYOFF CHECK FROM ANYBODY EXCEPT A BONA FIDE ESCROW OR TITLE COMPANY. NEVER RECONVEY ALL OR ANY PART OF YOUR INTEREST IN ANY TRUST DEED UNTIL AFTER THE PAYOFF CHECK HAS CLEARED. Why? Because a payoff in the form of a personal check accepted by you directly from a borrower could bounce after you've allowed the reconveyance to record!
X 16) On construction loans please promptly forward to my office
Preliminary Lien Notices" you may receive. (This notice, also known as a "prelien" notice, is not notice that a lien is or has been filed, it is sent to notify us of credit extended by materialmen or subcontractors. It is required by law in order for the creditor to protect and maintain his right to file a lien against the property behind you in the event the bill is not paid. Quite often an investor confuses this notice for an actual lien or something bad, it is not. We make every effort to verify payment of each one of the pre-liens received whenever a borrower asks for his next draw. There is no cause for alarm when you are properly insured against the threat of mechanic's liens. The A.L.T.A. title coverage provided on every Safe Trust Deed investment, insures your loan's position against the threat of any mechanic's lien getting ahead of your loan. We need the prelien notices so we know who has or has not been paid!
17) I am happy to meet with you in person at any time. However, there are many of you (dozens at last count) and only one of me, so please, by appointment only! We have had pushy investors show up unannounced at our door as we were seating guests for dinner.
18) Please consult your accountant or tax preparer and always keep track of and properly declare all loan points, interest and late charges received by you. You can bet the borrower will be showing them as a deduction on his tax return. All loan points and late charges are also taxable income, just like interest, according to one IRS employee... .
19.) Please try to follow the 37 rules that myself and other investors
have developed to protect you. The information is really not complicated.
Always view the property you plan to lend against, for example. You can
request a copy of the 37 rules to SAFER TRUST DEED INVESTING by mail.
You can expect the following services from me:
20) I will always be willing to arrange the re-sale of any note brokered by me, at any time, and charge you nothing for my services. You will be required, however, to forfeit any loan points received up front by you on that particular Trust Deed in order to help me attract a buyer, and the title company will have some title and escrow charges also. (This policy may not apply to loans written for longer than three years. All loans with loan terms in excess of three years may be difficult, expensive, or at times even near impossible to liquidate.) I would probably not recommend the funding of any loans for periods longer than 3 years by any lenders who might possibly want to liquidate them later. Also, attracting a purchaser for a note that is in default or bankruptcy may require discounting your investment. This free service does not include portfolio liquidation.
21) There are risks that exist for Safe Trust Deed investors that even my 37 point safety checklist cannot eliminate. A borrower being drafted by the military, earthquakes, sinkhole and other freak acts of God are real risks that will always be there regardless of what any person or any piece of paper says. I have been licensed for over twenty years and although I have never had a single private investor ever lose his investment and hope that I never will, each investment still carries some unavoidable element of risk. I have brokered apx. 900 loans to date earning investors an average yield of in excess of 12% over more than a decade and have had a 99.5% track record with only about 5 or 6 of those 900 notes resulting in a "BRAD EVANS" investor ever having to give up some of his interest on a note and deed of trust.
22) I will be happy to assist you in the handling of any problems that may arise, no matter how small; late payment notices, filling out demands, fire insurance expiration or cancellation notices, filing notice of default, etc. Call us and let us help you. Please avoid calling unnecessarily however. One nice elderly gentleman insisted on calling me twice a week whether he needed to or not. Multiply that times a few dozen borrowers and dozens investors and yes, I live with a phone in my ear. Corresponding by Fax, E-mail, US mail, is greatly appreciated by me.
23) I will properly handle all loan extensions, modifications, additional advances, etc., for you at no cost. When I handle these for you, you will receive, at no cost to you, all of the following:
and/or other considerations
24) On all construction loans, prior to the release of any draw, we will always call and verify that all building inspections were really passed by the county, check for new potential mechanics liens, verify that all payments to you are current, inspect the work performed and snap a polaroid. We also measure the improvements to confirm proper square footage, obtain a copy of the signed off permit card and check for unpaid bills, all as a standard part of our service to you. I will always send you copies of each and every draw release. We also make a constant effort to verify all payment due to all suppliers who have sent pre-lien notices to us.
25) We agree to keep you informed of any draw deviations on all construction loans and obtain your approval in advance on any draw deviations that are in excess of $5,000. We will send you a paper trail each 3 to 5 months for your file. Please check the date of the draw copies we send you for your file before calling as we still get a lot of calls from excited investors telling us the borrower is a payment behind only to find out the paper work is on a draw that took place 4 months ago. Before releasing draws we will always:
a. Check the loan servicing late list from the bank
b. Check to see if bills are paid
c. Check with the county to verify work completed/permit card signed off
d. Inspect and measure and photograph the property
e. Require borrower to pay anything delinquent
f. Call you if it is a draw deviation over $5,000.00
g. Check for liens, and stop notices
h. Obtain your permission for any draw release if deviating from the above.
26) When you call with funds in hand to invest, I promise to try to get your investment capital into a Trust Deed and working for you in as short a time as possible. Our rates are in no way connected to the prime lending rate, we are instead tied primarily to supply and demand, and sometimes the supply of investors does temporarily exceed the demand for money by borrowers. Trust Deed Investing may require patience at times.
Although our service has been a free service in the past, due to the higher cost of doing business we may have to begin charging a 1% brokerage service fee to investors on some loans in the future. I will however try to wait for the most part till I can raise the rate to the borrower by 1% to offset the possible fee if charged in the future.
27) Free loan servicing. We agree to set up, maintain and pay the bank cost for bank loan servicing of your Safe Trust Deed investments with SWB /Sierra West Bank. Earning high interest on smaller amounts is now available at no cost to you through our fractionalization program, whereby you may fund smaller portions of loans by going together with other parties. We have covered all the possible conflicts for you including a power of attorney. Giving you the right to file a notice of default if your partners signature was unavailable for any reason.
28) We will continue to make every effort to customize and improve our service to suit your particular needs. Please give us your feedback. We accept the fact that changes and minor adjustments will always have to be made.
Safer Trust Deed Investing
designed by Brad Evans, ©1996 Brad Evans
THE BRAD EVANS' PROMISE
The California Department of Real Estate will no longer allow brokers
to offer a foreclosure buy-back guarantee.
However, I personally stand behind all work I perform on every Safer Trust Deed investment brokered by me unless altered, modified, extended or changed by someone other than myself. Trust Deed investing does carry certain risks. No Broker can possibly guarantee your Trust Deed investments against depression, earthquake, war, flood, natural disasters, and other acts of God, and items not covered by title or fire insurance. In other words, I will continue to stand behind every aspect of MY work the best I can.
I promise that I will work diligently to assist in the process of re-selling any property that any private lender of mine may ever have to take back in a foreclosure (unless of course you wish to keep the property) until that property is sold; to work diligently in an effort to net the lender the return of all principle, interest, late fees, monthly payments, and any other costs and foreclosure fees, etc., that the lender has invested. In the event of a borrower filing bankruptcy, I agree to coordinate legal services that may become necessary in connection with obtaining a bankruptcy "stay" removal.
This "BRAD EVANS PROMISE" will also apply to all loans that I have extended, re-written, or modified. This page does not apply to loans altered, modified, extended, or re-written in any way by private investors or anyone else. (In California I am exempt from usury laws and you are not). Time is of the essence in a default situation and notice of default must be filed by you when 2 (two) payments are both late and before a third payment becomes late on your loan or any loan ahead of you if you have funded a junior loan. This offer of additional services would also become null and void where the lender allowed more than three back payments (on your loan or any senior loans if funding a 2nd) to accumulate before filing notice of default. This promise shall also become null and void if the fire insurance policy covering the subject property is allowed to lapse for any reason.
Thank you, C Brad Evans
BRAD EVANS REAL ESTATE LOANS
P.O. Box 163, Cedar Ridge, California 95924
Calif Dept of Real Estate, R.E.Broker Lic # 00426805
REAL ESTATE LOAN BROKER
P.O. Box 163, Cedar Ridge, California 95924
Safer Trust Deed Investing
designed by Brad Evans, ©1996 Brad Evans
PLEASE SIGN THIS PAGE AND RETURN IT TO ME.
KEEP THE REST OF "PROTOCOL III" TO REFER TO.
I have read, understand, and agree to abide by Safer Trust Deed Investing, PROTOCOL lll, ©1996 Brad Evans
I have also initialed six of the items, #3, 6, 9, 13, 15, and 16, and
I feel that this is an arrangement I am willing to abide by and at the
same time I realize that Brad Evans and I both reserve the right to cancel
this arrangement at any time.