1st Trust Deed Question

17 Replies

If the borrower is directing the funds to an LLC or self directed IRA would there be any potential problems down the line, for example if there was more than one person in the LLC?

Let's clear up your question.

What do you mean "...borrower is 'directing' funds 'to' an LLC/IRA..."?

A Borrower 'pays' funds to the Mortgagee.  A Borrower does not 'receive' funds to direct.

You certainly have a concern with something that sounds a little weird involving this LLC/IRA maybe it is something, maybe nothing.  If you touch on that a little too, might afford a better response.

Yes, it's not clear.

The Operating Agreement will govern the accounting of funds received by your LLC.

Depends on the type of LLC if another member has a liability to what happens within that LLC. Liabilities may arise from within or from outside that entity.

You may have loan servicing issues with your LLC doing collections on a note held, those liabilities may effect both members.

You could have tax consequences from a discounted note being paid off or a note in default and accepting a deed-in-lieu-of-foreclosure. the nature of the note, how it was funded, by cash or equity, can effect tax matters and potential liabilities.

Give some thought to more details and you'll get better replies. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

'All loans are written to an LLC, Inc. or self-directed IRA, not an individual, to ensure a cash-flow investment purpose.'

This is written in the disclaimer of under the current notes that are available.

Sems like that's telling you there is no personal recourse on any of the loans, we're still guessing, you're looking to buy.

Yeah to me it seems like whoever you're buying the notes from specializes in selling notes as an investment asset to SD IRAs or SD IRA LLCs and they are trying to eliminate UBIT concerns from prospective clients? I Don't know for sure, like Wayne said above we are really just guessing. Can you let us in on what website you're seeing this on, or a little more context?

Terminology here is still screwed up Robert which is why we are all left guessing at what you are drilling at.

Customarily the SDIRA (or LLC in the same setting) lends money and holds a note. They are the investor and they can also be the named Mortgagee. They are not the Borrower.

SDIRA's do not typically borrow funds.  (not even sure that type of thing is possible)  They use their funds for the investment.  

An LLC can borrower funds and lend funds.  Obviously restrictions apply in some settings.

So the disclaimer statement does not make sense.  To me it sounds like someone is trying to act like a lender and they are restricting the Borrower to LLC or SDIRA in the hopes of perhaps circumventing license requirements to make loans.  "For Investment Purposes" is typical to avoid residential designation and license requirements.  Again though, a SDIRA does not borrower, they lend.  

So I would guess that mention of an SDIRA a misstatement.  Not great support for their competency.  Well, the lack of clarity in general is not a good showing either honestly.

Is this some crowd funding thing?

Thanks for all the responses, here is the website- primeturnkey.com.  

With a brief review of that site.  I am not impressed but that is also not an easy thing to do.

The line above from the site "All loans are written to an LLC, Inc. or self-directed IRA, not an individual, to ensure a cash-flow investment purpose." - my same response still applies. An SDIRA cannot Borrower money and secure that money giving an interest in real property. They are using this statement as I said, to indicate the loan is for commercial purposes. I am just going to leave much of the hole this can dig alone but they are talking out their backside and do not fully understand what they are talking about or the implications.


They are mixing some ideas which will matter for any note investor.  My primary concern is the sale of the loan, implied by their website, is for mortgage servicing retained.  In other words, the investor buys the loan but they keep the servicing rights.  If an investor buys the whole loan, they own the whole loan including all servicing rights.  For some investors the idea of having another entity handle the administration with the actual servicing company can be a good idea provided the investor understands the options and the party that stands between the servicer and the investor is compitent.  

Which brings me to the next elephant in the room.  There is a statement in their Q&A which has issues:

"Q…What happens if the note goes into default for non-payment?

A…If a default occurs, an intensive collection campaign by both our servicing company and us as the lender will ensue. If the borrower cannot catch up their payments and remain delinquent after 90 days the property will be taken by POA appointment, signed at closing and we will approach you with a few options to sell us the note, or start foreclosure against the borrower, or other options."

A Lender/Mortgagee can not circumvent foreclosure with a POA.  So to say a property will be taken by a POA executed at closing is a red flag.  

In addition to that, the general default plan response just seems messy to me.  Like it is more of an after thought rather than a plan.  It does not seem to be a core competency of theirs.

For that matter, their first Q&A also has issues:
"Q…What is a “Note”

A “Note”, “Trust Deed” or “Deed” is simply another name for the “Loan” or “Mortgage” that a borrower has used to borrow against their investment property"

That is a bad layman answer.  It is more incorrect than it is correct.  A Note is NOT a Mortgage or Deed of Trust.  IMO, their answer implies a lack of understanding for loans in a fairly basic sense.  

The general game plan, which is not new, is a business who is buying property, fixing them up, then renting them out and offering to sell to other RE investors and offering financing.  The end game is then to take that note and sell it to you.  It is more of a mess than it is a well designed plan.  They are trying to take commissions on an equity origination, which you pay for.  They are trying to impute an interest in the loan post sale through the servicing demands.  Not to mention their other ownership restrictions such as restricted future sales.  

Moral of the story, I just see lots of issues they would have to clean up before considering any real investment talks.

This post has been removed.

Originally posted by @Dion DePaoli :

...

The line above from the site "All loans are written to an LLC, Inc. or self-directed IRA, not an individual, to ensure a cash-flow investment purpose." - my same response still applies. An SDIRA cannot Borrower money and secure that money giving an interest in real property. ...

I'm not the expert on the topic of SDIRA and borrowing, but I do not concur with the statement being quoted. Maybe @Dmitriy Fomichenko  can enlighten us. 

Originally posted by @Dmitriy Fomichenko :

@Steve Babiak  

I need to read this sentence in the context in order to comment, but I can not find anything like this on the site. 

@Robert H. 

can you provide the link to the page where you reading this language? 

 Not sure what sentence you are referring to but it would either be at very bottom of the 'available notes' page, or the QnA page.  Hope that helps.

@Dmitriy Fomichenko  - there was a statement that the SDIRA cannot be a borrower and offer real property as security. I don't believe this to be true. 

And I was hoping that you with your expertise could enlighten us all on that. 

Originally posted by @Dion DePaoli :

... An SDIRA cannot Borrower money and secure that money giving an interest in real property.  They are using this statement as I said, to indicate the loan is for commercial purposes.

Dion, your statement above is incorrect, SDIRA can get a loan for a property, the loan has to be non-recourse  which means that lender has no recourse against the borrower (SDIRA) or any other assets of SDIRA, underlying property is the only security for the loan. 

Medium logo 19 1Dmitriy Fomichenko, Sense Financial | [email protected] | (949) 228‑9393 | https://www.sensefinancial.com/free-consultation/ | CA Agent # 01876563

Originally posted by @Robert H. :

'All loans are written to an LLC, Inc. or self-directed IRA, not an individual, to ensure a cash-flow investment purpose.'

This is written in the disclaimer of under the current notes that are available.

This statement doesn't make a lot of sense to me. While I understand that this could be their model (not to work with individuals), I'm not sure how it ensures a 'cash-flowing investment purpose' and what it means...

Have you tried contacting them directly and asking some questions?

I was able to locate one of their reps here on BP: 

http://www.biggerpockets.com/users/ChrisE3

Medium logo 19 1Dmitriy Fomichenko, Sense Financial | [email protected] | (949) 228‑9393 | https://www.sensefinancial.com/free-consultation/ | CA Agent # 01876563

Of course SDIRA's can borrow money and offer the property as security against the loan. Retirement plans use secured loans to buy property all the time. The note must be non-recourse and all that, but it's done frequently. (Whether it makes sound financial sense or not is another issue.)

"All loans are written to an LLC, Inc. or self-directed IRA, not an individual, to ensure a cash-flow investment purpose."

I can't read minds better than anyone else, but I believe what they are trying to say is that they loan to entities only to ensure a business purpose and thereby avoid compliance issues with Dodd-Frank and the SAFE Act. If you were buying notes from this company, you would want to know that, as well as how they show the loan was properly originated.

Individuals can borrow for a business purpose and avoid Dodd-Frank. It's just easier to show when you loan to an entity. Some HML's will only loan to an entity for this reason though, strictly speaking, it's not normally required. Perhaps that's what they mean?

A "cash flow investment purpose" has nothing to do with any of this. The loan is either for a consumer purpose (i.e. personal, family, or household use) and must strictly comply with DF and so on, or it's for a business purpose and does not. There's no such thing as a cash-flow purpose in this context. I'm not even sure what that is. Both consumers and businesses can invest for cash-flow.

The statement appears nonsensical to me.