Experiences investing in trust deeds
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CA · Member since 2011 · 762 posts · 182 votes
12yI 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.
63 Replies
- CA · Member since 2011 · 762 posts · 182 votes12y
Good question whether that scenario would be considered a consumer loan or not. I don't know for sure. I would think the part about grandma moving in would cause it to be considered a consumer loan. Now if you as borrower signed an affidavit to the effect that you were going to use the proceeds strictly for business purposes (which you will find in most business loan docs) and later used it for consumer purpose (grandma moving in) you lied under oath and I'm not sure lender could be help responsible for that. This kind of uncertainty can be avoided when lender *knows* exactly what borrower is up to, that's why relationships are so important in this business and that, among other reasons, is why lenders like to only lend to borrowers with a track record.
You can look up each of those regulations mentioned to see the consequences of non-compliance.
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
On another note, I have seen over the past few years it getting more difficult to find good low risk high rate trust deeds to lend on. I'm pretty picky so I pass on a lot of stuff. There is a lot of money out there looking to be lent and fewer deals. And the deals are getting hairier, less just cosmetic REO or SS flips and more major gut rehabs with additions, new spec home construction, etc... Or people with horrendous credit or some issue. I also think there is more risk now because of the run up in prices the last 2 years. I don't like these because with my style of investing I do not go see the property personally or meet the borrowers, and I wouldn't want to get into the hairy stuff unless I was much more involved (which I don't want to be). Also bigger national hard money type lenders are getting a lot more liberal with lending guidelines. I just saw a true stated income loan product being offered by a large national lender for investors that goes to 70% LTV, requires zero income documentation, no 4506 required to be signed, no limit on the amount of other properties owned, and rates are in the 7% range. No way to compete with those rates as a trust deed lender. The question will be where to invest my money next if I can no longer find trust deeds I'm comfortable with? I'm not a big fan of the stock market and the really great deals on rentals seem to have mostly passed.
- Dallas, TX · Member since 2011 · 308 posts · 59 votes12y
Originally posted by @Rob Cee:
Thanks for the explanation Dave, that is good info. So Dave you are saying, if I went to you to get a hard money cash out refinance on my rental 4-plex and I checked the box on the 1003 that I do NOT plan to occupy as my primary residence, but then I went used the cash out proceeds to go to Hawaii or have my grandma move into one of the units, that trust deed your originated is now considered a "consumer loan"? And what are the consequences for the lender for that being a consumer loan? Can you point me to more info on that specific law somewhere?
I'm also curious about this but in the case of an investor using the loan proceeds to go to Hawaii, typically this is the reason HML's only release rehab $ on completed work. The investor must use his own funds to complete the work first, so technically the loan amounts are a reimbursement.
No legal advice
- CA · Member since 2011 · 762 posts · 182 votes12y
I pretty much agree with everything you said. If you find where to invest let us know. I totally agree risk/reward ratio is getting too high. Maybe it is time to find another investment class, if such a thing exists.
This reminds me of some flippers I was working with a while back. They were having a hard time getting their offers accepted so their solution was to raise the offer price, well, no, when the margins get too thin the solution is to find another business. We may be getting to that point.
Maybe the answer is to get more hands on. There are flippers out there still that are getting it done but they want good terms and fast action. They are successful and have cash and are willing to do low ltv high quality loans. It's just a matter of finding that individual and creating that relationship.
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes12y
Originally posted by @Rob Cee:
So Dave you are saying, if I went to you to get a hard money cash out refinance on my rental 4-plex and I checked the box on the 1003 that I do NOT plan to occupy as my primary residence, but then I went used the cash out proceeds to go to Hawaii or have my grandma move into one of the units, that trust deed your originated is now considered a "consumer loan"?
Bad example. You didn't state the initial purpose of the loan.
You seem to be fixated on the silly box on the 1003, Rob. David C. and others have been very clear that owner occupancy is completely irrelevant with respect to the definition of a business purpose or consumer purpose loan. All the 1003 does is provide the lender with personal information from the borrower. I know more than a few lending lawyers who recommend against relying on a 1003 for anything more than this. It either starts as a business purpose loan or a consumer purpose loan and you can't convert a loan from one type to another by your subsequent actions.
The first question any astute private lender will ask a potential borrower is, "What's the use of the money?" This is what they will use to determine if it's for a business or consumer purpose. They will also ask for this up front, in detail and in writing. Your broker with 20 years experience provides this document to you for review, yes?
For many loans, you will wire your money directly to title. Here, the borrower can't access it to spend personally. For other loans, such as for the rehab, you might receive a check from the lender or from escrow. I suppose you could decide to spend the money personally even though you told the lender it was for the rehab, but that would be fraud on your part. The lender would always have your written statement explaining the use of the money in case you contested anything.
Nobody cares about OO or NOO except maybe conventional lenders such as Wells Fargo, who follow GSE rules and loan on this basis. By bringing up Wells Fargo so often, you seem to have confused the rules conventional lenders use for their consumer purpose/GSE compliant loans with those for the business purpose loans most HML's provide. I hope this is not the basis of your loans.
Out of curiosity, wouldn't it be safer and easier for you to find your own borrowers in Seattle?
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Rob Cee Its the original intent of the borrower if there is a compelling reason that the borrower had to make a change in direction and can prove that some outside event or agency created a different direction everyone one in the transaction is fine.. You can't regulate or insulate yourself from those coming into a deal with fraud on their mind.
Agree with Jeff on this point
- Lender · California and Florida · Member since 2008 · 319 posts · 194 votes12ySB978 in 2013 forced many of the issues mentioned in this thread to be dealt with. 3rd party appraisals are required and must be presented to the trust deed investor. If it's new construction or repairs over $100,000, a third party fund control is required. There is also a cap on the ARV allowed now at 80%. So in the last boom, you may have had a builder go under that borrowed the full amount and spent all up front. With fund control, funds are released as work is being completed according to a set schedule. If the builder went belly up during the project, money should remain to finish the construction. Other mistakes we hear about: 1. People brokering transactions illegally and committing usury (most not understanding what that is). 2. Funding deals without a full appraisal with true comparables to understand true value. Not all appraisers understand ARV and our world. 3. Making loans with zero payments for a long period of time. How on earth would you know there's an issue in this scenario until it's too late? 4. Working through layers if agents and brokers. You often never get the full and true story. As in, originated as non owner occupied but in realty, you were duped. Had an attorney tell me a woman in Orange County, in collusion with a notary, fraudulently created paperwork and changed signing authority of their LLC with the Secretary of State. The originating broker was working through two other agents somehow to close the deal. Loan on land with no payments for a year. She was hours away from getting the loan but the originator got suspicious and looked some of the other people in the entity. Luckily, the transaction was stopped. Here is California, I hear you should expect 2% of the cost of the loan in foreclosure fees. It used to be 1% but the required advertising in print has made it far more expensive.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Rob Cee when hard money lending with folks you have no personal knowledge or relationship with one must use this analogy flying analogy... when I am done with my Runup at the end of the Runway and getting ready to take the run way to depart I go through a very quick last minute check and I always think OK what could kill me today if I over looked something... When I lend money I use the same principal how is this borrower going to take this money and not pay it back.. Thinking through all the ways I could end up being departed from my funds.
At the end of the day one can not totally insulate yourself from default it happens, but to mitigate it what I have done the last 8 years or so is be patient and found a nice group of folks that are now repeat clients. Now this is not realistic If I was running a large company but for a private investor looking to invest in TD's this can be a good way to create long term relationships that are mutually beneficial
Check with the state of WA many of the loans your contemplating do not need a broker or NMLS licensure
@Aaron Norris Just fyi I have recommended your company to many LA investors as an alternative to going half way around the country and trying to buy a cash flow rental. Not sure if you still have the 7 or 8 year buy and hold product. But I liked that product. I have meet your dad a few times at various events and I really like his presentations and especially his experiences in Texas
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Terence Wang making loans to own or with the Idea would I own it for what I loaned is not the best strategy... The reality is if you have a foreclosure.. You are going to have lost 6 months to a year of interest. So deduct that from what you loaned. you will have 2 to 3k in cost maybe more. You will no doubt have issues with the property either functional or intentional IE your borrower is pissed and strips the house. Hold over tenants etc etc.
If your going to purely equity lend.. then in my mind you need to back off another loan amount.
In addition one of the main things I learned over the years IS LTV is nice.. But I like actual CASH to loan .... a 70 or 80% LTV loan but with NO cash out of pocket for the borrower is still a loan that is risky if there is a Hiccup. Those Loans that have ACTUAL CASH to LTV regardless of borrowers creds are much stronger loans in my experience.
IE I will take a 50% cash to loan deal with no income docs and good value docs Either my own investigation or appraisals.. Over an 80% LTV no cash in the deal 700 credit score. The no cash deal has a far higher chance of failure than the no Doc provable 50% CASH into the deal loan.
- Los Angeles, CA · Member since 2014 · 15 posts · 1 vote12y
I agree with you. I like to see borrower contributing at least 30% of the purchase price. When the borrower pays 50% or more in cash, the loan is fairly secured. Even if the property is being foreclosed, borrower probably won't trash to house (ruin his equity).
- 12yRob CeeLebanon, NH · Member since 2012 · 258 posts · 87 votesOP
Thanks every one for such excellent and informative answers on this thread, much appreciated. One thing I do not like about trust deed lending is you have to pay ordinary income taxes on the interest income if you use non retirement cash to invest. Even with a decent chunk of money lent out at say an average of 10% over 12 mos, the NET after tax income is smaller then you would think it would be. I do think it is a great vehicle for retirement funds since you do not have to realize the tax on the interest income, especially if you can re-invest the interest income and get the effect of compounding.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes12y
I'm surprised that @Jon Holdman hasn't brought up one of his situations:
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