I'm doing some passive investing in trust deeds and thankfully have never had any issues with defaults yet. I'm not setting up my own trust deeds, I'm investing though hard money lenders who do everything and I write the check. I'm doing this in the Western U.S. in trust deed non-judicial foreclosure states. I'm curious, are their any investors out there that had to go through a foreclosure on a trust deed they owned? What were the total costs (property taxes, insurance, foreclosure processing fees)? Did you recoup your principle?
Any other stories of bad experiences? Like having to take back a half-finished property or having the market go south on you when you had to take back a property? I'm investing mostly on trust deeds that are fix & flip properties and some rental properties. I have not ventured into funding spec building yet.
I originate my own trust deeds here in SoCal. Had to start foreclosure a few times but never went all the way, borrower always came through. Foreclosure fees are limited by statute to about 1% of loan amount plus publishing/posting/tsg etc costs, comes out to about $3k, more if it's a really big loan amount, borrower pays upon reinstatement/payoff/trustee sale. There are a bunch of foreclosure trustee's around, any one can give you a quote. Recouped principal and interest every time, except once when I only got principal back.
The key is to find a really good borrower (flipper), treat them right and they will treat you right, it can be a great relationship if done right. This, to me, is the absolute most important part of this business...interest, fees, terms are secondary.
No really bad experiences ... yet. Mostly the problems come when borrower stops communicating. Irony is most problems can be worked out if we put our heads together, but when they stop communicating everything turns to do-do and not much can be done.
I've only done flipper loans, no keeper loans, and no ground-up loans.
Keep ltv low and 1st position only. Lot's of folks do 2nds ( gap funding or whatever you want to call it), they are going to really get whacked one of these days, if not already, these are generally the ones that raise their hands at the REIA's when asked who are the private lenders, usually about a third of the crowd.
Risky business if you don't know what you are doing, safe if you do. I'm fairly new at this compared to some, but getting better every day (isn't that a beatles song).
Good luck.
I originate my own trust deeds here in SoCal. Had to start foreclosure a few times but never went all the way, borrower always came through. Foreclosure fees are limited by statute to about 1% of loan amount plus publishing/posting/tsg etc costs, comes out to about $3k, more if it's a really big loan amount, borrower pays upon reinstatement/payoff/trustee sale. There are a bunch of foreclosure trustee's around, any one can give you a quote. Recouped principal and interest every time, except once when I only got principal back.
The key is to find a really good borrower (flipper), treat them right and they will treat you right, it can be a great relationship if done right. This, to me, is the absolute most important part of this business...interest, fees, terms are secondary.
No really bad experiences ... yet. Mostly the problems come when borrower stops communicating. Irony is most problems can be worked out if we put our heads together, but when they stop communicating everything turns to do-do and not much can be done.
I've only done flipper loans, no keeper loans, and no ground-up loans.
Keep ltv low and 1st position only. Lot's of folks do 2nds ( gap funding or whatever you want to call it), they are going to really get whacked one of these days, if not already, these are generally the ones that raise their hands at the REIA's when asked who are the private lenders, usually about a third of the crowd.
Risky business if you don't know what you are doing, safe if you do. I'm fairly new at this compared to some, but getting better every day (isn't that a beatles song).
Good luck.
Thanks for the experiences Dave. Sounds like you are finding the flippers who need money and setting these all up yourself. I invest with a number of hard money lenders (some in CA) and they make the points and .5-1.9% of the yield. I've been trying to only invest with hard money lenders that have been around a long time and have a track record. I do review the appraisal, loan app and credit report very closely on the deals they send me. I turn down a lot of what they send me. I always look at every deal if I had to take the property back could I quickly sell it and recoup my principle + foreclosure costs, or worst case if the market tanks could I rent it and get a decent return. The deals are getting a little harder then a few years ago now that hard money is more plentiful. There is more money out there now and rates are getting pushed down a bit. The fix and flip deals I was lending on used to be more just cosmetic flips. Now hard money lenders are lending on more complicated rehabs, and tear downs + new construction, and development projects. This scares me a little as I worry if the market crashes when a flipper or builder is only half done a project, they walk, and I'm left with a half done project.
I have been there a few times. You can’t really create any “rules of thumb” on what your expenses are going to be as each deal and nature of default is different and has its own characteristics.
On one of the few seconds I have made on multi-unit property, the borrower decided to turn existing carports into bedrooms and bathrooms without permits, got red-tagged by the city, blew it off, then got criminally prosecuted by the city. He walked away.
On that one, I had to exercise the assignment of rents clause in my deed of trust, take control of the property rents, negotiate with and bring the senior lien current and continue to service it, and arrange for management takeover while I finished the foreclosure. I bought it back on a credit bid.
Fortunately, the rents collected covered the properties expenses and the borrower's improvements were actually pretty well constructed. What followed was years of negotiation with the city to get as built permits, installation of some but not all of the original repairs and improvements the city wanted, a successful appeal of the county's pie in the sky tax reassessment, and a discount buy out of the senior lender after the FDIC seized them and sold the note to a big bank. I learned more than I ever wanted to about FDIC loss share agreements.
It took a lot of time and effort, and there was no doubt a lot of risk in the endeavor, but once I met the city’s scaled back requirements and got the property permitted it was a total win. I was originally in the deal for the income, but wound up with a very nice property. Private money lending is not for the feint of heart.
I worry about builder loans for the same reason, that's why I don't do them. I can't tell you how many builders I've talked to that went under when the market crashed, i'm sure that's true for you too.
It sounds like you are doing it right the way you vet the loans. I don't work through brokers, I am the broker (for myself and two other trust deed investors only) that way I can control things better.
I'm curious, since you lend in other states, is there any state where you can make say 15% working through brokers? Lending rates are so regional, I've often wondered if returns are better outside of my SoCal lending area.
Deals are getting harder to find that's for sure, but I've been able to find a couple of good flippers and I give them good terms so it's been okay ... I keep my terms below the hml's so I get the cream of the crop flippers. I've even had hml's ask me if I have any deals i can't handle because they have money but few deals.
Really depends on how the company is structured. We happen to be owner/operators. We pay 15% for usually 6-12 mo. Some are brokers that don't have any skin the game and pay 9-12%. We have done some foreclosures but again, since we own it, we take care of it.
Check the track record and how many deals the company has done. Hopefully you can find a company that is owner/operator. It's headache free.
I think it would be hard to make 15% on a 1st trust deed (unless you are getting the points too), 2nd TD maybe. I only invest in 1st's. I haven't made anywhere close to 15%. So far I have been making 11% on my fix and flip loans (the hard money lender that I invest through charges 12.5% and 2 points to the borrower, they keep the points and they keep 1.5% for servicing, I get 11% return as the trust deed investor). The lenders I work with send me deals from 8.5% to 13%, similar rates in CA, AZ, WA, OR, TX and UT where I look at loans. Some of the loans and borrowers are really hairy so I pass on those. One loan I looked at guy had missed several mortgage payments in 2014 on his credit, had tax liens on the prelim, a prior BK and the house was in the ghetto. Some investors snap those up though.
Some of these lenders have funds as well that you can put your money in where they pay 10-12%. So instead of buying individual trust deeds you are in a fund that pays 10-12% annually. They lend the money in the fund out to investors doing flips, etc... . The nice thing here is that you can re-invest the interest income in the fund so you have compounding growth. With the rule of 72 at 10% return your money doubles in 7 years. Also you do not have to constantly look for new trust deeds when the ones you had pay off (this can be time consuming especially if you are picky, and there will be gaps where you don't have your money lent out, a fund would eliminate this issue). I'm not sure what the extra risks are with the fund vs. individual trust deeds? I guess if the whole company went down or got sued or something the fund could take a hit, and/or maybe you worry about getting your money back. So maybe you have less control? Anyone have any opinion on these hard money funds vs. individual trust deeds?
David C., how much work are the flippers doing on the flips you are lending on? Are these major gut rehabs or room additions? Or just cosmetic? Are you lending on ARV with a hold back for fix up work taken in draws? How much skin do your borrowers have in the game?
I've even had hml's ask me if I have any deals i can't handle because they have money but few deals.
I get this all the time from lenders I don't know. Sure, I work hard to meet and vet our borrowers, check their current and prior deals, look at their potential flips, and generally get to know them well. So why wouldn't I just hand them over to you if I'm currently loaned out, for the few bucks you might give me on just your first loan to them. Perhaps someone could explain to me why no one ever sends us their leads like this?
We too only loan to professional flippers, with substantial experience, and who are in it for the long haul, Rob. Unlike David, we're not brokers but we use one for our originations. No first-timers learning on our dime. Before we even look at or evaluate a property, we make sure we’ve gotten to know, like, and trust the borrower – a well worn real estate cliché to be sure, but one we live by. And, I completely agree with David about integrity.
You're much more likely to get screwed by a scoundrel with great numbers than by loaning to someone with integrity and a thinner deal. Make no mistake, the numbers are important, but distantly (including LTV, in our view). This side of lending is much more personal than any 1003 would dictate.
While I think you're doing a lot right, Rob, I frankly think you're taking risks you don't have to. You seem to focus on evaluating the paperwork behind your loans (loan app, credit report, appraisal) but little in the way of meeting the borrowers themselves. Perhaps I'm wrong here, but you didn't say it.
Unless you invest in a blind pool, in which case it's the syndicator you have to check out, I'd be very uncomfortable having a broker filter our deals and our borrowers. It sounds like you reject many of them anyway. Complicated rehabs are fine so long as you know your borrower has the skills. Anyone can put lipstick on a pig but the complicated rehabs are where the money is. Plus, there are really aren't any viable "light" rehabs around anymore since these tend to get bid up by those with less experience. I also wouldn't want to be a lender holding the bag on new construction or development in this market, either. There's an easier way.
We find our own borrowers almost exclusively at real estate clubs, vet them exclusively ourselves, and simply pay our broker a nominal fee to originate the loan. 1st TD's only. For this we get to keep the points and interest you've been giving away. It sounds like you have a system that works for you too (we've never had a loan go bad either), but if you're loaning on new construction or development, I doubt you be able to "take the property back could I quickly sell it." Just be careful, and know to whom you loan.
I've even had hml's ask me if I have any deals i can't handle because they have money but few deals.
I get this all the time from lenders I don't know. Sure, I work hard to meet and vet our borrowers, check their current and prior deals, look at their potential flips, and generally get to know them well. So why wouldn't I just hand them over to you if I'm currently loaned out, for the few bucks you might give me on just your first loan to them. Perhaps someone could explain to me why no one ever sends us their leads like this?
We too only loan to professional flippers, with substantial experience, and who are in it for the long haul, Rob. Unlike David, we're not brokers but we use one for our originations. No first-timers learning on our dime. Before we even look at or evaluate a property, we make sure we’ve gotten to know, like, and trust the borrower – a well worn real estate cliché to be sure, but one we live by. And, I completely agree with David about integrity.
You're much more likely to get screwed by a scoundrel with great numbers than by loaning to someone with integrity and a thinner deal. Make no mistake, the numbers are important, but distantly (including LTV, in our view). This side of lending is much more personal than any 1003 would dictate.
While I think you're doing a lot right, Rob, I frankly think you're taking risks you don't have to. You seem to focus on evaluating the paperwork behind your loans (loan app, credit report, appraisal) but little in the way of meeting the borrowers themselves. Perhaps I'm wrong here, but you didn't say it.
Unless you invest in a blind pool, in which case it's the syndicator you have to check out, I'd be very uncomfortable having a broker filter our deals and our borrowers. It sounds like you reject many of them anyway. Complicated rehabs are fine so long as you know your borrower has the skills. Anyone can put lipstick on a pig but the complicated rehabs are where the money is. Plus, there are really aren't any viable "light" rehabs around anymore since these tend to get bid up by those with less experience. I also wouldn't want to be a lender holding the bag on new construction or development in this market, either. There's an easier way.
We find our own borrowers almost exclusively at real estate clubs, vet them exclusively ourselves, and simply pay our broker a nominal fee to originate the loan. 1st TD's only. For this we get to keep the points and interest you've been giving away. It sounds like you have a system that works for you too (we've never had a loan go bad either), but if you're loaning on new construction or development, I doubt you be able to "take the property back could I quickly sell it." Just be careful, and know to whom you loan.
Thanks Jeff for the good info. I don't meet any of the borrowers or know them at all. I'm relying on the HML's to do this vetting. That's why I try to go with HML's with track records for decades and solid reputations. If they have been in the business that long, they have seen cycles and market crashes and lend accordingly. I'm more of a passive investor. I would make more money but networking in investor clubs and finding my own borrowers but I kind of just want to invest passively and not have to do all that. There is one HML I like that does not lend on flips. They lend on existing rental property where borrowers have issues and can't get a conventional loan. I kind of like this because you know the value right now and you are at 60% or less of the current appraised value (vs. flips you are ARV). These are established rentals and you know the borrower is getting rental income to pay your trust deed. I find flips a little more risky as they are more subject to sudden changes in the market or running into some major unforeseen fix issues, there are more moving parts. Where existing rentals with tenants are not so much affected by sudden market changes. These loans tend to be longer periods so your money could be out for 2, 3 or more years. This is good and bad. Good because you get a constant return and don't have to constantly search for the next next trust deed. Bad because your money is tied up for a long period in case you want to use it for something else.
David C., how much work are the flippers doing on the flips you are lending on? Are these major gut rehabs or room additions? Or just cosmetic? Are you lending on ARV with a hold back for fix up work taken in draws? How much skin do your borrowers have in the game?
Mostly gut rehabs, none yet with room additions or new construction. Although, I am doing one right now that is down to the studs and adding sqft, I hope the guy isn't getting in over his head, I've known him for years so I'm not worried, he's very successful and will pull it off I'm sure, even though he hasn't done anything this extensive before.
It's hard to find a deal that needs only cosmetic and still pencils.
I lend on purchase price. I lent based on ARV for a while but it was a hassle to do draws so I stopped. The draws were nothing formal, I simply had escrow hold back funds after closing until I authorized release, still thought it was a hassle.
Turns out, for my market, when I do the math on past loans, 100% of purchase price is almost 65% of ARV. So, since the distinction between Loan-to-Purchase and Loan-to-ARV is blurred anyway, why not just lend based on purchase, is the way I look at it.
The amount of skin in the game varies depending on the deal and my relationship with the rehabber. I've been doing mostly 75%-90% of purchase price, sometimes 100% but rarely. I give a little discount on the points if they will go for 75% or less, that way the loan becomes marketable to trust deed investors under the new CA legislation. It's funny, you'd think every flipper would want the max loan amount, but not all do, some will go for lower ltv's if you give them better terms, they're happy and I sleep better at night.
So the question that follows from the borrower side becomes how do you meet the flippers that you work with when you vet them yourselves? You can find the HMLs at the real estate clubs who will loan to almost anyone which is fine, but I would prefer to vet the individuals/companies and develop a relationship that is mutually beneficial.
So the question that follows from the borrower side becomes how do you meet the flippers that you work with when you vet them yourselves? You can find the HMLs at the real estate clubs who will loan to almost anyone which is fine, but I would prefer to vet the individuals/companies and develop a relationship that is mutually beneficial.
At the REIA's. Talk with the private lenders, either they identify themselves as a group when prompted by the club moderator or it says on their name tag. Then talk and get to know them during the networking time (too bad there isn't more of that). Then go find a broker to originate the loan, if one is required in your state, it is in mine. It's work and it's a process.
I originate my own trust deeds here in SoCal. Had to start foreclosure a few times but never went all the way, borrower always came through. Foreclosure fees are limited by statute to about 1% of loan amount plus publishing/posting/tsg etc costs, comes out to about $3k, more if it's a really big loan amount, borrower pays upon reinstatement/payoff/trustee sale. There are a bunch of foreclosure trustee's around, any one can give you a quote. Recouped principal and interest every time, except once when I only got principal back.
The key is to find a really good borrower (flipper), treat them right and they will treat you right, it can be a great relationship if done right. This, to me, is the absolute most important part of this business...interest, fees, terms are secondary.
No really bad experiences ... yet. Mostly the problems come when borrower stops communicating. Irony is most problems can be worked out if we put our heads together, but when they stop communicating everything turns to do-do and not much can be done.
I've only done flipper loans, no keeper loans, and no ground-up loans.
Keep ltv low and 1st position only. Lot's of folks do 2nds ( gap funding or whatever you want to call it), they are going to really get whacked one of these days, if not already, these are generally the ones that raise their hands at the REIA's when asked who are the private lenders, usually about a third of the crowd.
Risky business if you don't know what you are doing, safe if you do. I'm fairly new at this compared to some, but getting better every day (isn't that a beatles song).
Good luck.
I wonder if there is a rule of thumb note buyers or trust deed investors have for the total costs of foreclosure and reselling a property to re-coup your principle in case of default. You mention $3,000 above for foreclosure processing costs. Then you have to likely pay at least a years worth of property taxes, Realtor commission when you sell it, fix up costs to get it ready for sale, home insurance costs, possible eviction costs if you lent money on a rental property, etc.... So it seems maybe a good rule of thumb is costs of about 15% of your loan amount in total costs to re-coup your principle via foreclosure process and resale of the property? So if you are lending at 65% LTV you are really at about 80% LTV. And if prices were to decline in a down market you could easily lose principle in a foreclosure process even at 65% LTV.
The only rule of thumb that I know of and it seems to be more less universal among hml's is a max loan-to-arv of 65%. That would cover most foreseeable costs. Yes, badness could still line up in such a way that you could lose (some) principal. This risk can be mitigated almost to zero by working with only experienced flippers, 1st position only, and low ltv's, imo.
I had a foreclosure last week. The property was sold over principal+interest +foreclosure cost. So it turned out I made more money this way with additional late fee and higher interest rate.
I try to find my own borrower but I remember CA requires to have the license in order to do this legally and collect underwriting fee. Working with a broker seems a lot easier.
If you take the whole note, it there a place to resell it on the market with a premium? Is there a marketplace for note sales?
I had a foreclosure last week. The property was sold over principal+interest +foreclosure cost. So it turned out I made more money this way with additional late fee and higher interest rate.
I try to find my own borrower but I remember CA requires to have the license in order to do this legally and collect underwriting fee. Working with a broker seems a lot easier.
If you take the whole note, it there a place to resell it on the market with a premium? Is there a marketplace for note sales?
Hi Terrance, so you found your own borrower & set up all the documents yourself on this loan you just foreclosed on? Were you having it serviced by a servicer? Was this a fix and flip loan...I'm curious why the borrower defaulted? Did this sell at the trustee sale or did you get it back and then sell it though a Realtor? What were your total out of pocket costs of foreclosure and the sale? What LTV or ARV did you originally lend at? Was this in CA? Sorry for all the questions, but sharing this type of information is very helpful to other trust deed investors in CA. I appreciate it!
I've been a note buyer and HML since 1989. Most of the experienced HML still around today are former conventional loan brokers who lost their markets to banks. Due to their lack of creative thinking, they tend to focus on rehabbers.
My gripe with lending to the investor market is that there is no real back end. Desperate HML's lend others' money at increasingly higher LTV's and reduced yields. That's a formula for disaster when the market shifts.
And the real estate markets do change. Remember 2009? How about 2001? 1992? 1989? I started in 1978 so I've seen a few cycles. Sadly, plenty of investors (like their Wall Street counterparts) have bad forgetters.
My point is not to be pessimistic but rather to be mindful of market changes and not to be tempted to increase yields by accepting higher risk for you (or your bene). Here in CA, most markets have slowed down but prices are holding at a plateau and have not showed signs of weakening. It may not take much bad news to shake that, however.
I've been a note buyer and HML since 1989. Most of the experienced HML still around today are former conventional loan brokers who lost their markets to banks. Due to their lack of creative thinking, they tend to focus on rehabbers.
My gripe with lending to the investor market is that there is no real back end. Desperate HML's lend others' money at increasingly higher LTV's and reduced yields. That's a formula for disaster when the market shifts.
And the real estate markets do change. Remember 2009? How about 2001? 1992? 1989? I started in 1978 so I've seen a few cycles. Sadly, plenty of investors (like their Wall Street counterparts) have bad forgetters.
My point is not to be pessimistic but rather to be mindful of market changes and not to be tempted to increase yields by accepting higher risk for you (or your bene). Here in CA, most markets have slowed down but prices are holding at a plateau and have not showed signs of weakening. It may not take much bad news to shake that, however.
Rick, thanks for your input. I'm sure some trust deed investors got whacked pretty bad in the CA price crash from 2008-2012. Especially those doing 2nds. What are some of your recommendations for trust deed investors in CA to lend safely right now? I'm primarily funding loans bought to me by CA HML's right now, I don't originate my own. I've been lending on SFR fix and flips and 1-4 rental property. I'm out of state (formerly lived in CA for 26 years), so I do not go see the properties, I rely on the appraisals supplied by the HML originating the loan.
Hi @Rob,
The trust deed was purchased through a broker and they served the loan and filed foreclosure. I only signed a paperwork to change the trustee to foreclosure trustee.
It is a rental property in CA and my loan was a refinance to save the borrower from trustee sale. I was suspicious that it might default. LTV is 50%. So even if nobody bid, I am ok to take it back and sell through MLS.
Hope it helps.
Terence
Hi @Rob,
The trust deed was purchased through a broker and they served the loan and filed foreclosure. I only signed a paperwork to change the trustee to foreclosure trustee.
It is a rental property in CA and my loan was a refinance to save the borrower from trustee sale. I was suspicious that it might default. LTV is 50%. So even if nobody bid, I am ok to take it back and sell through MLS.
Hope it helps.
Terence
Thanks for the info. I'm doing something very similar to you and funding loans though hard money brokers in CA. Do you have any type of checklist to make sure the HML originating the loan and the escrow company handling the closing are dotting all their i's and cross all their t's with the paperwork? That everything is correct with the note, deed of trust, title insurance, title check,hazard insurance, etc...? The HML sends me the borrowers signed documents and I review, but I haven't really been formally trained in what to look out for. The loans are going through nationally known escrow/title company name brands so I'm relying on the fact they know what they are doing.
Here's a simplified version of how I look at a loan:
The Collateral: If everything went wrong, would I be ok taking the property back minus all expenses. ?
The Borrower: Do I have an ethical person willing & capable of paying on time?
Will they communicate with me BEFORE there is a problem & work to responsibly solve it?
The Documentation: Did I read & understand the agreement?
Did all the right parties sign the agreement properly?
Is the agreement legal & recorded properly?
When in doubt, pay an attorney to review it with you.
The better the collateral & documentation, the less important the borrower is in the formula.
Here's a simplified version of how I look at a loan:
The Collateral: If everything went wrong, would I be ok taking the property back minus all expenses. ?
The Borrower: Do I have an ethical person willing & capable of paying on time?
Will they communicate with me BEFORE there is a problem & work to responsibly solve it?
The Documentation: Did I read & understand the agreement?
Did all the right parties sign the agreement properly?
Is the agreement legal & recorded properly?
When in doubt, pay an attorney to review it with you.
The better the collateral & documentation, the less important the borrower is in the formula.
Thanks Ellis, when you say "agreement" are you referring to the note? How do I know the note is legal and has been recorded properly? I'm relying on the HML (who is licensed with the NMLS & CA BRE) & escrow/title for this expertise. Do you have a checklist to make sure the HML and escrow/title are doing all the paperwork correctly when funding a new trust deed in CA?
I think I'm pretty decent on valuing the collateral I'm lending on and the borrower's ability to re-pay. What I'm not as much an expert on is that all the i's are dotted and t's are being crossed with all the paperwork in funding a new trust deed in CA. I'm more relying on a licensed HML and nationally known escrow/title company to get all that right for me. Are there investors who run the documentation the borrower signs through a attorney on every HML they fund? I am also only doing non-owner occupied investment property.
Wow!! I think you're playing with dynamite, Rob. You don't meet the borrower and you can't look at the property because you're out of town. Because a broker is licensed doesn't mean his paperwork protects you or that he knows what he's doing. Don't ask me how I learned this.
Title companies are insurance companies. They don't review loan docs on your behalf or ensure that your documents protect you. Frankly, they don't care about you at all. Ditto your escrow company, who must follow your broker's lender instructions, the escrow instructions, and of course, the law. To state the obvious, the only time you'll know if you're protected is when you have to take action against someone, or if they take action against you, and by then it's too late.
You really ought to speak with a good lending attorney, who can review the loan process with you in detail. Even with a checklist, how will you know if the note and DOT protect your interests? How do you know if the assignments to you are enforceable? Did your broker obtain his loan documents from a lending attorney?
I'm not trying to scare you (in fact, really I am), but my suggestion is to either get a set of loan documents from a lending attorney for your broker to use, or have a lending attorney review those from your broker. Or, speak to the attorney who provided the docs to your broker but make sure he specializes in lending and is used by other HML's. Don't ask me how I learned this either.
Jeff
Wow!! I think you're playing with dynamite, Rob. You don't meet the borrower and you can't look at the property because you're out of town. Because a broker is licensed doesn't mean his paperwork protects you or that he knows what he's doing. Don't ask me how I learned this.
Title companies are insurance companies. They don't review loan docs on your behalf or ensure that your documents protect you. Frankly, they don't care about you at all. Ditto your escrow company, who must follow your broker's lender instructions, the escrow instructions, and of course, the law. To state the obvious, the only time you'll know if you're protected is when you have to take action against someone, or if they take action against you, and by then it's too late.
You really ought to speak with a good lending attorney, who can review the loan process with you in detail. Even with a checklist, how will you know if the note and DOT protect your interests? How do you know if the assignments to you are enforceable? Did your broker obtain his loan documents from a lending attorney?
I'm not trying to scare you (in fact, really I am), but my suggestion is to either get a set of loan documents from a lending attorney for your broker to use, or have a lending attorney review those from your broker. Or, speak to the attorney who provided the docs to your broker but make sure he specializes in lending and is used by other HML's. Don't ask me how I learned this either.
Jeff
Hi Jeff,
These are not notes I am buying, I'm the original funding investor on these. I could have a mortgage specialist attorney review the docs, this would be about $1,500. There are a few HML's I lend with. One has been around since the 1970's another for 20 years and has a very good reputation. So I would think being in business that long they would be doing the loan docs correctly to protect the investor. There is another one though that does not have as long of a track record that I should have an attorney review their loan docs. The HML that has been around for 20+ years tell me less then 10% of their investors do drive by's on the properties, and likely none of the investors know the borrowers. In terms of the collateral I could also pay an 2nd appraiser to do an appraisal review for me or a local home inspector to go though the house if I have questions about the collateral. I think you have very good advice though that I should heed.