2. As a condition of funding this loan are you receiving the maximum title insurance available to you? We require a full extended A.L.T.A. lenders form one policy of title insurance WITH NO DELETIONS just like the bank gets when they fund a loan. Anything less than the maximum coverage can result in the loss of investment dollars without maximum coverage due to defects of title, mechanics liens and other items not covered by other cheaper standard C.L.T.A. coverage. The borrower pays for it so always require the require the maximum lenders title insurance coverage. We've found that insisting on a full, form one, extended A.L.T.A. lenders title policy, with no deletions on every investment will better protect your investment. Well meaning and honest brokers, friends, partners and relatives have been known to accidentally bury an un knowledgeable friends, partners and relatives purely by accident. Should an unforeseen claim to title, dispute, mechanics lien or other surprise item pop up unexpectedly it's better to be fully covered. Also, always obtain the maximum title insurance coverage update available any time you rewrite, extend, alter, modify or make any change to any note and deed of trust.
3. Always make all your investment funding checks payable directly to the title company handling the escrow because if investors never let their broker handle their money their broker can never mishandle their money. Now this is not to say that brokers who handle funds or process escrows are anything but honest. I am only saying that if you never allow your broker to handle your money AT ANY STAGE OF THE INVESTMENT PROCESS, then your funds will "NEVER" be mishandled even accidentally. RIGHT? This should be called the $40 million dollar rule. See the article in "Better Than Gold" about the Golden Plan, Marathon, (etc.) investors who unfortunately wish they'd followed even just this one of the 37 rules.
4. Some investors will make out instructions of their own to the title company above and beyond all of my brokers documents. Is there anything you wish to provide in the way of additional conditions requirements or information. Feel free to request a copy of our comprehensive loan escrow instructions & document templates that we've developed and feel free to call me if you would like to go over each of the items they contain .
5. Take time to read and familiarize yourself with each item contained in the pre-lim (preliminary title report) issued by the title co. on each property shortly after escrow is opened. The pre-lim is a snapshot of the condition of the title to the subject property today before escrow closes so it will always contain items that will have to be removed as a condition of your funding of the new trust deed loan investment to be recorded there. Do you want read and familiarize yourself with the specific items of record that are not to remain as well as those that are? Even though the loan is very well secured and the thought of taking back a $200K home for $100K might even appeal to you many investors like to read the pre-lim to become familiar with the properties easements, assessments, mineral rights, assessed valuation and so on which is all right there in black and white in the preliminary title report that
6. The smaller each of your individual T.D. investment increments are the higher the degree of diversification you will have! This can be especially important to investors relying on the monthly income from payments. Are you certain that this T.D.'s total required investment will NOT exceed more than 10 or 20% of your total over all trust deed investment portfolio? For example an investor with $200K to place in well secured high yielding first trust deed investments would be better diversified if they funded half of 4 loans than all of one or 2 loans. Most investors feel the same way and that is why the practice known as fractionalizing loans has become so popular. Having half ownership in twice as many well secured first trust deeds offers better diversification. I heard about an investor who retired and put all his funds into one large first loan instead of placing the funds in 25% of 4 equally as well secured firsts. He earned the same yields with the same good security but when his only borrower changed jobs and begun make his monthly payments 2 at a time every 2 months better diversification in the 4 loans when one of the 4 borrowers was late he would still be receiving payments on the other 3.
7. Are you confident that you have committed to the shortest possible loan term? T.D.'s funded for too long of a term can be difficult, expensive, or even impossible to liquidate should an emergency arise. Most of the well secured new home construction loans we arranged are for a term of one year. One year notes can be liquidated in an emergency for full face value. I hear about investors who wanted to fund a loan for 10-15 even 20 years and under certain circumstances you may find your note quite expensive to liquidate if an emergency were to arise. Most of our investors have found funding loans for 1-2 or 3 years seems to work best.
8. Become familiar with the steps necessary to tell the title co. to file notice of default should the occasional borrower become delinquent in his payments. Your title co. will cheerfully handle all details of the foreclosure process for you so long as you file the notice of default promptly if a borrowers falls behind 2 payments. As outlined in Protocol IV (an outline of the free service we provide private investors), we strongly recommend that investors who encounter a borrower who falls behind 2 pmts. call the title co. and have them file the notice of default promptly. Again we've found that it's best to do this anytime two monthly payments have both become late (or also when any loan isn't repaid within 30 days of the balloon date). Occasionally 1 or 2 out of any 100 borrowers will file a bankruptcy to stall for additional time. It doesn't happen very often and poses no threat to you or your investment if you've followed the rules. Even when this does happen your interest clock will still continue to tick daily. No bankruptcy can ever alter the security or position of your investment and you're lenders title policy insures you against it. Even the costs are charged in full to the borrower and can legally be added right on to what the loan amount. The worst case scenario for you the investor is that you will suffer a temporary interruption in your cash flow from that particular loan. All agree that at times trust deed investing can be a very slow moving thing.
9. Never make any loan extensions, additional advances, modifications or other changes of any kind no matter how small to an existing real estate loan without first obtaining written approval from any junior lien holders of record. You can be sued for this even if you didn't know a junior lien holder of record existed. Improperly executed extensions, modifications, rewrites, subordinations, or changes of any kind to a note and deed of trust no matter how small can result in loss your investment. It sounds a little scary but it's also a lot like saying don't jump off the bay bridge either. There's no good reason for anyone to alter or modify a note. Your broker is exempt from usury in CA and you're not. If someone wants a little extension or some minor change to be made to a note and deed of trust your broker will have the title co properly update all documents and renew fire and title policies, draw and record all the proper documents, modification agreements and issue a brand new full A.L.T.A. extended lenders title policy with no deletions to best protect your investment.
ESTABLISHING PROPERTY VALUE
10. It's a good idea to always physically inspect a of real estate your about to lend money against even if the broker, appraiser and title company have already looked at it. This is a must!
11. Did you take the time to establish your own personal opinion as to the value of the real estate collateral by using as many approaches to value as possible? Most agree that it's better if you have more than one indication of a properties market value. Here are some indications of value you can check on yourself.
- read the appraisal
- ask your realtor for any info on closed sales of similar properties Are you
- check the tax assessors opinion of value on the pre-lim or at the counter at any title company
- if it is a four plex or income property find out the most common ratio between yearly gross rents other similar properties command.
- what is the property worth to you if you were to buy it today.
- Don't over look what can sometimes be the best of all indications of value.
12. Did you remember to use the actual purchase price as the value of the property whenever a property has changed hands, sold, or purchased (all or even any part) within the last 18 months that figure is the final value I use to base my loan approval on. What could be a better or more accurate indication of a properties value than the very price it actually sold for. Remember, 18 months (to the day). plus the value of any verifiable capital improvements made to the property since purchase.
13. Learn to distinguish between real and personal property. Never mistake "personal" property for real property located on the premises when establishing your own opinion of value? (This can be very tricky or confusing with respect to some items like trade fixtures, a mobile home, hot tub, and many others). Real property is defined as "that which is affixed to the earth". Sometimes even property that is screwed down still isn't real estate like items belonging to a tenant.
14. Did anyone ask the borrower how he plans to repay the short term loan? Even though private money loans are approved based primarily on real estate equity it doesn't hurt to find out that he's already pre approved for his take out loan, a speck home is pre sold, or the reverse might happen if you found out the loan was going to be paid back prematurely because of a pending sale.
15. Is the loan amount to be over $30,000.00 and less than
$750,000.00? I avoid arranging loans under $30K for reasons
having to do with all the restrictions & limitations loans of less
that $30K are subject to in California. However at the other limit
homes able to justify loan approvals in this range are in my opinion
beyond the realm of single family construction and equity lending. As a
broker I am restricted as to how many investors I can put together in a
particular loan. This coupled with not wanting to ever be involved in
the liquidation of a multi million dollar house sets the upper limit of what our
investors feel comfortable with.
DETERMINING A SAFE AMOUNT TO LEND
16. Never lend more than 60% LTV (Loan To Value Ratio) on even the most prime of owner occupied homes, and not more than 50% LTV on non owner occupied speck' homes. 60% LTV means that your loan should never exceed apx. 60% of an owner occupied property's appraised value (or purchase price within 18 mo., whichever is lower) as collateral for any money you lend.
17. If a T.D. is to be secured by raw land income or "commercial" real estate are you certain that your loan does not exceed a 35% L.T.V. on land specifically and probably never more than 40 to 50% on the best of commercial real estate. This is what we call the maximum allowable loan to value ratio, unless an investor was willing buy the property for a figure higher than that. (25% to 35% is our current LTV for prime land & lot loans in first position only). Never fund a second trust deeds on raw land. Never fund second trust deeds on raw land.
18. Did you check the property out yourself for any adverse conditions that might affect the property that might not be of record or that can't be revealed with a physical inspection? Ask the neighbors.
19. Did you only use "existing" improvements to establish the properties current value and are you sure you are not mistakenly counting ANY 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.
20. Do I want or need any last minute 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.
21. 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 many more). What about loan servicing? Also, on fractionalizes investments who will hold the original note and deed of trust? Your broker can't. (Did you know that it is illegal for the loan broker to hold the original note & deed of trust in the State of California)?
22. Did you require the purchase and pre payment of 12 months fire insurance premium
paid in full in escrow. Caution: Coverage could be cancelled if you
allow the borrower to write a check for it outside escrow and his check
bounces! SEE PROTOCOL IV
FUNDING JUNIOR LOANS (SECONDS)
Not recommended unless you are very experienced.
23. Whenever funding a junior loan do you have enough cash
reserve on hand to cover at least 6 to 12 months payments on any loan
ahead of your junior loan and will it continue to be held in reserve
till payoff.
24. When funding junior loans did I record a "Request for notice" of default, and or consider other notifications. Ask your title company about a document called "Request For Notice of Delinquency". It may be a lot more helpful than a request for notice of default in some situations says private investors who had to foreclose on junior loans only to find out that the first ahead of them was 30 months in arrears and the first holder had never even filed a notice of default!!
25. Did I receive verification and or accurate proof of any loan balances and due dates as well as all other pertinent information on any senior loan ahead of my junior loan? Order a "Statement of Condition" on any loan to be senior to any investment you make always as it reveals all.
26. If I plan to invest in a junior trust deed did I make certain that the due date of my junior loan FALLS SAFELY FAR ENOUGH AHEAD of the due date of any senior loan ahead of my loan (I strongly recommend at least a 12 month gap, difference in due dates, or "fuse" as we call it). It's a lot cheaper to cure a senior loan ahead of your second for just the amount of back payments than it is to have to cure that same loan by having to pay the entire principal balance off in full.
27. Never subordinate any interest in real estate transaction unless I clearly understand specifically what will be required of me to protect my junior position if problems do arise. Never invest in any trust deed secured by a junior position behind a senior loan that you yourself can't feasibly afford to assume full financial responsibility for. (If you subordinate any interest in real estate or interest in a note secured by real estate you may be forced to take full responsibility for any loan(s) you subordinated to in order to protect your investment or face total loss of your investment). Never subordinate in any real estate transaction unless you clearly understand what specifically will be required of you to protect your position if problems arise. Always ask for more cash down, more additional collateral (that also has to again meet all 37 tips to safer trust deed investments) or both! Should you still wish to subordinate any interest to any loan, check that loan you are subordinating to against all 37 tips to safer trust deed investments as well. I don't recommend subordinating ever unless it will improve your equity position. If anyone else in a transaction has agreed to subordinate any of their interests to mine did I establish that they clearly understand what will be required of them financially to avoid loss of their interests should problems arise?
28. Did I make sure that I haven't made a junior loan behind a senior loan of the "Equity Line or Credit Line" type where that senior loan has any type of provision or ability to grow in size later.
About The Borrower
29. Am I confident the borrower is not in a "loan cycle". As a broker I don't rewrite past loans for more than the amount of principal owing. I would only be willing to increase the principal amount of a loan upon re writing it if it happened to still be below our maximum L.T.V.
30. Do you know how to recognize (and avoid) equity skimming, cash backs, and even the blatant "misuse of subordination". Trust Deed Fraud, Scams and Rip offs can often times be easy to spot if you know what to look for and where to look for it.
- Are you certain that no one in this transaction is subordinating away TOO MUCH of their real estate equity to another?
- 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. Never fund a second trust deed on raw land. Never fund second trust deeds on raw land. Unimproved raw land has no improvements to generate rental income so if you were to fund a second loan on raw land and subsequently had to foreclose you would have to come out of pocket with additional funds to cure the senior loan or lose your investment.
32. Can you ALWAYS be reached by mail at the address of record listed on the recorded documents? Can you always be reached the quickest at the address used? I heard about a very knowledgeable experienced investor who had a small second note and trust deed completely wiped out by the first at a foreclosure sale on a property with lots of equity because he was retired and was out of state for 4 or 5 months traveling around in his motor home and didn't have his mail forwarded.
33. Always send a 90 day notice of balloon payment to all borrowers 120 to 150 days prior to the date of their balloon payment. Although it may not be mandatory on non owner occupied loans or vacant land loans, sending the notice on every loan you fund in my opinion is a good habit to develop?
34. If there is to be more than one lender on a particular note it may prove convenient if investors receive power of attorney recorded "only for the purpose of enabling you to file a notice of default" in other beneficiaries absence if the situation arose and for example one fractionalized partner is on vacation, out of the country, or otherwise unavailable.
35. We found it best to never allow a corporation or partnership to act alone as a borrower without requiring the corporations owner(s) to also sign personally for the loan again individually on a personal guarantor form. The ability to obtain a deficiency judgement against a $500.00 corporation could prove fruitless. A borrowers motivation to walk might be hindered if HIS own personal name is on there along with the corporation. It also immediately separates the boorrowers you want from those you dont.
36. Tax service, have you decided if you want a service to notify you if back taxes stack up on a property whose equity is securing your investment dollars?.
37. Your nose knows the answer to tip #37 by now. How does a trust deed investment sit with you now after confirming all of the above? You'll learn to develop trust in what your nose says. If the investment has made met all the above 36, then the final judgement call should be easy.
Find out what existing trust deed investors have to say about it!
- Please feel
free to download and use these proven 37 tips to earning safe high
yields (used successfully to protect nearly 1,000 trust deed
investments)
- How
to roll your IRA into well secured high yielding first trust deeds
revealing other td investing practices like funding construction loans to build new homes.
- Trust
Deeds vs Stocks
- A
description of what our free investment brokerage service has to
offer you (Protocol III)
- Show
Me The Math!
- How
the "Rolls Royce" of title coverage (the Full Extended ALTA Lenders
title policy with no deletions) differs from the standard CLTA
policy other private money brokers offer
- Still have a question? Email Brad Evans for an answer now!
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