All Forum Posts by: Jeff S.

Many here don’t realize that there are custodians and administrators for IRAs.  By law, all IRA funds must be held by a custodian. Depending upon whether they are a bank or a trust company, custodians are heavily regulated by the IRS, DOL, possibly the FDIC, State Banking Commissioner, and maybe the Comptroller of the Currency. Administrators are not subject to any such scrutiny and are really just middlemen. Be super careful.

An administrator will pass your funds to a custodian in the background, provide statements, and hopefully help you stay within the law when you invest your IRA funds. Custodians do exactly the same thing but with the added regulatory and financial scrutiny noted above. Why would you place your money with an administrator?

It's not always obvious, but you can tell if you are dealing with a custodian rather than an administrator because they will usually have the word "Trust" in their name or they will be a bank or brokerage. Always ask, and don't be swayed by a sales pitch suggesting that the distinction doesn't matter—it absolutely does. If you think this distinction is unimportant, consider what happened to investors who placed their IRA funds with American Pension Services,—an administrator whose founder mishandled their money causing a $22 million loss.

It sounds like you want checkbook control, @Katie Accashian In this case, you need a special-purpose LLC. This means an LLC with an operating agreement specifying the IRS regulations regarding prohibited transactions, disqualified individuals, and others. It will allow you to invest the money on your own but under authority of the custodian. You would typically use a lawyer to set this up for you. Not LegalZoom.

Last, be careful of recommendations. Some here have self-interests. Other recommendations might not suit your situation. For example, fee structures among custodians are all over the map. Some charge based on account value, others per transaction, and some use a combination of both. If, for example, you are lending money, which involves few transactions, then select a custodian that charges by the transaction. If you are flipping houses, which is transaction-intensive, then choose a custodian that charges by the value of your account. What works for some might not be your best choice.

Best of luck to you, Katie.

If they want your money, @Pavan K., why aren’t they offering you a stake in the partnership? This sounds like it could be a good deal for the partners, and perhaps the bank, but a terribly risky deal for you, with little upside.

What exactly do you mean by, “There will be a promissory note drafted for the amount and the duration and interest rates”? This is not even close to the documents required for a properly drafted loan. Do you think the bank’s loan will consist of one document, drafted by your borrower? Did your borrowers mention securing your investment with a recorded mortgage or deed of trust, personal guarantees, lender’s title insurance, or anything else? Of course not. Even this is an incomplete list.

Worst of all, the main reason not to make this loan is that you will not hold a first position-lien against the property. This means that if the bank forecloses, and you can’t pay it off, you will lose all of your money with no recourse to anyone.

One option to secure your loan is if one of the partners has a free and clear property worth significantly more than your loan. In this case, you could use it to cross-collateralize your loan with a first-position lien. If their deal goes bad, you could foreclose on that property and hopefully recover your funds. If not, don’t even think of this.

No matter what, consult a qualified lending attorney to understand your legal options and ensure you have proper loan documents in place to protect your investment.

Nothing builds credibility more than telling your lender that they are protected with loan documents you got from a stranger off a website.  Or, protecting yourself with such documents.

There is no such thing as a single loan contract. Our loan package consists of nearly 20 individual state-specific documents. If you had these documents, would you know how to fill them out? Plus, we require lenders title insurance as well as fire and hazard/liability insurance policies – all with specific endorsements. How would specify these to ensure everyone is protected?

How would you determine compliance with all licensing and usury laws in the state the property is located?

Find a lending lawyer, @Suraj Apoorva. Note, that this is not the same as a real estate attorney.

Early last year, one of our borrowers, an extremely experienced rehabber who had recently been diagnosed with diabetes, informed us that he’d been in and out of the hospital so frequently that he wouldn’t be able to complete the flip we had loaned on as first position lenders.

We were aware that he had borrowed an additional $110k from a second-position lender. I bring this up because it’s identical to the amount you have. He was also in escrow to sell the house as a busted flip, as-is. This would pay us back less than we were owed but still enough to come out whole.

We all tried to negotiate a short payoff with the second-position lender, who foolishly demanded payment in full. As a result, the sale was canceled, we foreclosed, and the second-position lender was wiped out. We now own the beat-up POS property that we need like a hole in the head. Fortunately, we are currently in escrow to sell it. The second position lender will get nothing. Who wins here?

Your statement, @Ivan Castanon, that “… foreclosure house sales are usually sold near ARV or maybe at a slight discount,” couldn’t be further from the truth. Foreclosure auction buyers cannot walk the property and have no idea of its condition. Nor can they see any construction plans to assess true value. Thus, they take extreme risks and look for corresponding discounts.

Additionally, after the first position lender accounts for default interest, penalties, legal fees, foreclosure fees, accounting fees, and everything else, the equity in your combined <65% ARV loan can easily erode to zero. This is real.

The two comments above can’t be repeated enough. Never lend in second position unless you have the wherewithal to pay off the first. Never lend far from home.

If you don’t have enough money to lend locally in first position, you don’t have enough money to lend.

In over 15 years of lending our money privately, here are the most common questions we are asked by potential borrowers. I suggest you form an answer for each, @Jonathan Warner. We provide this lending criteria to all potential borrowers in an email, shortly after we’ve met.

• Background: What is your lending background? Or if none, a general overview of what you do as a lender. Where do you get your money?

• Borrower experience: Will you lend to newbies? How much experience must your borrower have?

• Interest rate: Your interest rate is XX% APR interest-only plus X points.

• Loan Amount: We specify this as a percent of the purchase price. Other lenders will specify a maximum LTV.

• Payment Options: If you allow payment deferral, note it here. If not, delete this.

• Loan Range: What is your min and/or max loan amount, in dollars?

• Credit Rating/Bank Statements/Tax Returns: Specify your requirements, if important to you.

• Purchase Criterion: How do you define a good deal, which will be profitable for your borrower and safe for you? How will the borrower know they brought a property you will fund? This is a crucial requirement.

• Prepayment Penalty and Loan Duration: Will you charge a prepayment penalty?  Do you have a minimum loan duration?

• Property Location: Where will you lend? (Never lend far from home. Never lend out of state. Consider that you could end up owning the property.)

• Vacant Premises: You don't want an eviction. Premises must be vacant at the time of closing. (I answered for you.)

• Construction Loans: Will you make these? Under what terms? (Not at first, if ever.)

• 1st Trust Deed: We only offer purchase money loans in the form of a 1st trust deed. We do not provide rehab or construction loans. You are welcome to obtain these funds as a 2nd elsewhere if you choose. (These are our terms)

• Fast Funding: How fast can you fund? (A huge competitive advantage for the little guy. The faster the better. Slow funding will kill you.)

• Note Duration and Extensions: What will be the length of your note? Will you provide an extension? How many? For how much?

• Lending to Entities Only: (Not required but think carefully.) This might depend upon your license, if required.

• Loan Document Costs: Will you charge for these? How much? Any other charges?

• Personal Guarantee: Will you require this? Will you lend to a retirement plan (which will prohibit a PG)?

• Property Evaluation: Will you require an appraisal? A BPO? Will you do your own valuation? A personal walkthrough? (Think speed of funding). Will you require a contractor estimate for the rehab?

• What We Will and Will Not Lend On: Bad foundations, mold, asbestos, substandard, and/or fire damage? Wood frame? Masonry? SFRs, MFHs, condos? Industrial? Commercial? Historic homes? Will you do refinances? What else? Depending upon your background, there is no right or wrong answer? Think competitive advantage.

• Relationship Building: How will you get to know the borrower? (Please don’t tell me you will lend anonymously to those you met here or on the web).

• Title/Fire/Hazard Insurance Requirements: Not part of this list but what will be your insurance requirements? These should be separate bulleted lists you provide to your borrower so they can send to their title company and hazard insurance broker.

Now that you showed an interest in lending with no experience, you will no doubt receive DMs from every crackpot and their brother trying to convince you to lend them money. Don’t respond to these. We always meet our borrowers face-to-face. Getting to know them over lunch is the heart of our loan process.

Spend an hour with a lending attorney. Discuss usury and licensing in your state. Most importantly, understand the difference between a business purpose and consumer purpose loan.

Read my post in this thread, which details our process in actionable terms. It’s a bit old now but still 90% accurate for us.

Good luck.

@Patrick Roberts wrote:

@Jay Hinrichs I know of one person who is buying high LTV preforeclosures Subto while they’re off market by paying the owners around $10k-$15k to walk away, quit claiming them into an entity, then seller-financing the entity holding title to the property to owner-occupants under the pretense that it's for commercial purposes on interest-only balloons at inflated values."

Amazing. Let them pull this crap in CA now. Instructing or deliberately causing a borrower to sign business-purpose loan documents when you know the money will be used for consumer purposes has always carried civil liabilities. Beginning this year, with AB 3108, it’s now a crime that can result in a felony with up to 3 years jail time.

I’d love to see one of these prosecuted.

I don’t see much difference either. BP has no reason to improve the search feature, which they could fix in a heartbeat. It’s not in their interest. More posts mean more eyeballs. More eyeballs mean greater viewership, improved SEO, and increased revenue. This applies even to the 100,001st question about LLCs vs Insurance.

I recall a rule here prohibiting responses like, "This has been answered many times. Do a search." I'm unsure if that rule still exists, but it’s clear they want dialog.

And yes, @Scott Mac and @Joe S., I fully agree with your comments about appreciation. Though my response might help others, common courtesy suggests you thank those who took the time to answer you. I used to provide detailed answers to DMs, which are private and help only the requester. Since “thank you” seems to have gone out of style, I now limit responses to one or two sentences.

I had this exact conversation with a borrower just a few hours ago, and it surprised us both. We’re not used to seeing emergency declarations as frequently as they do in Florida.

Our borrower is a local rehabber with a property scheduled to be funded today and close tomorrow. However, the buyer's bank refused to fund the loan, stating they needed to conduct a full inspection—inside and out—to confirm the property still exists. He mentioned the distance to the nearest fires (about 20 miles), but the bank isn’t budging. Why they need to inspect the interior when the exterior is pristine remains a mystery, but we don’t make the rules. It’s also unclear if they plan to order another appraisal. Maybe someone here knows?

I suppose this is routine for East Coast lenders. Even though we live in earthquake country, this was a new experience for us.

The pickin’s are slim in Salem, but there seem to be several real estate clubs in Portland if you’re willing to drive an hour. Here’s a Meetup link that might be helpful to you, @Melis Torres. If you can’t attend a particular event, call the club leader and ask for recommendations to some private lenders. Do this even if you attend in person.

I know there are many honest lenders out there, and everyone has their self-interest, but building a face-to-face relationship has not gone out of style. Borrowing anonymously from an online solicitation can easily lead to yet another unfortunate BP story. For what it’s worth, we won’t lend you a dime unless we’ve had lunch together.

“I guess I missed my chance looking for a private money lender because a hard money lender was interested in my deal.”

I don’t understand this—what does one have to do with the other?

What’s even more unfortunate, @April Smalls, is that newbies are falling for it.

A few years ago, someone created a fake website that impersonated our company. It included a Google Voice phone number, and the scammer answered calls pretending to be me, using my real name. He asked a few people to send him money in Bitcoin. Bitcoin!!! Shockingly, some actually did.