We use the Marketing for Private Money checklist to remind us to do marketing to make sure that we have all the private money that we need to finance deals.
IMPORTANT NOTE: Please make sure you are properly licensed (if required) in your state before actively marketing for private money. We have additional information on that for our Real Estate Investor Bronze Members and/or contact your attorney for details.
Or, consider hiring a Private Money Coordinator using the How To Hire A Private Money Coordinator checklist to raise all the private money you need for your real estate investing business.
A Private Money Coordinator is someone whose sole job is to go out and raise private money for your business. Sometimes they are experienced mortgage brokers that are accustomed to raising money for other clients and you are just one of their clients. Other times they are working exclusively with your financing needs in mind with you as their only client.
We have extensive additional checklists, independent contractor agreement samples, private money presentations and much more in the Real Estate Investor Wiki if you are interested in hiring a Private Money Coordinator (or to use yourself if you want to raise your own money).
Until my next post,
James
There are 9 risk categories associated with investing in trust deeds or becoming a private lender and the one we will be discussing here is the risk associated with senior encumbrances.
A senior encumbrance is a claim against the property that has a higher priority than your investment in the property. Whenever you lend on a property that has a senior encumbrance you need to be concerned about some additional risks associated with those senior encumbrances.
Specifically, if a senior encumbrance is not paid as agreed by the borrower, to protect your investment as a junior lien holder and minimize the potential of loss, you must pay the amounts necessary to cure the default and keep the senior encumbrance in good standing. If you fail to do so, you could lose your entire investment if the senior lien holder forecloses.
So, how do we significantly reduce that risk as a private lender? Well, the first thing that comes to mind is to opt for investments where you are the senior encumbrance. Be cautious when you are presented with an opportunity to invest where you are not the most senior position. Can you be in first position as the most senior lien holder and have someone jump you in line? Usually no, but there are exceptions like property taxes. If your borrower fails to pay property taxes on the property than the county can put a lien on the property and that lien is a priority lien above mortgages. So, even in first position you need to be aware of what can happen and what you will need to do to protect your investment.
It is also important to review senior encumbrances before lending in a junior position since some can include clauses that forbid junior liens completely or insist that the senior encumbrance be paid off entirely if certain conditions are breached.
While there is definitely risk associated with senior encumbrances when investing in trust deeds, often the higher, fixed rate of return still makes these investments very attractive to investors.
Until my next post,
James
There are 9 risks to investing in trust deeds and in this article I will be discussing the risk of foreclosure and how to significantly mitigate this risk.
As a private lender who is loaning money secured by real property, foreclosure is what allows you to recoup your investment should the borrower stop performing. So why is foreclosure considered a risk when investing in trust deeds or loaning money against property?
Part of the problem is that when a borrower fails to pay on your loan, there may be additional complications like senior liens that they are not paying on as well. What happens if you lend money and the borrower is not paying you, in second position, and is not paying the lender in first position either? Well, if you fail to protect your position, you may lose your entire investment. Protecting your position may mean that you need to bring the entire first loan current by making up back payments or, in some cases, you may need to completely pay off the senior lien holder to protect your investment.
Do not underestimate the time that it takes to go through the foreclosure process. I do not personally recommend that you try to foreclose yourself even though I know of people who routinely do their own foreclosures. Instead, I suggest that you find a competent attorney and have the attorney make sure that you are doing the right things to protect your investment and conduct the foreclosure. Having a competent attorney to handle this for you really makes this type of investment much more attractive. While we do not normally expect to have to foreclose when we make the initial investment, knowing you have someone that can handle it in a way that is almost completely hands off for you is just good business.
Of course, we are assuming that you are prudently selecting the loans you are making based on the borrower, the property itself (with a good, accurate appraisal) and also the amount of your loan in comparison to the value of the property (that is, you want a healthy equity cushion). When you combine good borrower selection with professional, competent appraisals and conservative loan to value ratios coupled with access to a great attorney should you need to foreclose, trust deed investing is a very attractive investment.
The often high, fixed rates of return secured by real property worth 30% or more than your initial investment makes trust deeds an appealing alternative investment in today’s market. It’s worth any serious investor’s time to take a closer look.
Until my next post,
James
If you have ever considered lending money secured by real estate to get a higher return, then you will want to know about the 8 risk factors of trust deed investing. These are the real risks that you will face as a private lender, for which I have also included some brief tips on how to mitigate these risks.
First, there is a chance that you could lose all of the amount you have invested and you could need additional funds beyond what you’ve already invested. It is true that if your borrower stops paying, you may need to come up with additional funds to foreclose (usually by hiring an attorney to do it on your behalf) and to maintain or protect the property. If you fail to do this, there is a chance that you could lose your entire investment. That is why it is critically important to know your borrower and have additional resources beyond what you have invested in the event that you need to protect your initial investment.
Second, it may be difficult to determine the true value of the property. It is much easier to lend $70,000 against a property that you know beyond any doubt is worth $100,000, but what do you do when it is hard to determine the value of a property? Make sure you feel comfortable and confident in the value of the property you are lending against because if the lender does not pay, you might end up getting the property and have to sell it.
Third, you may need to foreclose. Foreclosing can take time and as I mentioned above, it can also cost you additional money at a time when you’re likely not receiving payments on the loan to begin with. I strongly encourage you to hire an attorney to complete this process for you, but there is definitely an expense to that. Provided you know that your loan is at a very low value compared to the value of the property you are foreclosing on, you can expect to foreclose and recoup your initial principal, back interest, as well as legal fees and occasionally even more.
Fourth, there is a danger for junior lien holders. If you are the second lender (or later) lender on a property, you do need to be concerned with liens senior to you. If they are not being paid, you will need to protect their interest in the property to maintain your security position. Often this means making up back payments so that you can start the foreclosure process. It can, depending on the senior lien, require you to pay off the entire senior lien. To protect yourself, make sure you thoroughly understand the risks of being a junior lien holder or only invest in deals where you are in first position.
Fifth, there is a lack of liquidity with trust deed investing. While strides have been made to create a secondary market for selling trust deeds and notes, these types of investments are still considered very illiquid investments. This means that you must be prepared to invest for the long term and must be prepared to accept the fact that there is likely no willing buyer to take over your position if you need to get out early. Some borrowers may have the resources to help replace you as a lender, but this lack of liquidity is best considered before you invest.
Sixth, bankruptcy by the borrower could delay and discount your investment. Since a bankruptcy will often stop a borrower from making required payments and stall foreclosure proceedings, you could be left waiting for a bankruptcy ruling with no income from the note. Knowing your borrower and their ability to repay the loan will reduce, but not completely eliminate this risk.
Seventh, not having hazard insurance could open you up to the risk of fire and other catastrophe. Making sure your borrower has purchased adequate insurance on the property and named you as additional insured as lender can help offset this risk.
Eighth, there may be a conflict of interest since the borrower or owner of the trust deed may also be presenting the investment opportunity to you. Just like in any transaction, it is important to realize who is an independent third party and who is not independent and is involved in the transaction.
In conclusion, even with these 8 risk factors–many of which are similar to those of other investments–the high fixed rate of return of trust deeds and the fact that they are secured against real property make them extremely attractive investment alternatives.
Until my next post,
James
