Just yesterday the Feds raised their rate. Experts predict that many individual lenders such as trust deed investors who lend loans based on property – called home equity line of credit (i.e. HELOCs) – will see their loans can-kicked.
So if you are trust deed investor what can you do to protect your funds?
1. Take time to read and familiarize yourself with each item contained in the preliminary title report that is issued shortly after the escrow is opened. This report (otherwise known as a pre-lim) contains items that will have to be removed as a condition of your funding this new trust deed loan investment. Many investors like to read the pre-lim to become familiar with the properties easements, assessments, mineral rights, assessed valuation and so on. Some of these terms may be removed later on when you gain control of the property; some not. You may like to see its contents.
2. Have you committed to the shortest possible loan term? Trust deeds that are funded for too long are more risky since they can be difficult, expensive, or impossible to liquidate in case of an emergency. Many investors fund for no longer than a year. Deeds are safe in that they can be liquidated in the event of an emergency for full face value. Other investors have found that funding loans for two or three years seems to work best.
3. Never make any loan extensions, additional advances, modifications or other changes of any kind to an existing real estate loan without first obtaining written approval from other minor lien holders of record. You can lose your investment and be sued for this even if you were unaware that such a lienholder existed.
4. Go down and take a look at that property yourself even if even if other parties – such as the broker, appraiser and title company – have already looked at it. After all, it’s your money that you’re loaning to fund it.
5. Did you use as many approaches to value as possible to rate the building? There are various ways of gauging the properties’ market value and you may want to use a range to ascertain that you’re making a wise investment. Here are some indicators of value that you may want to use:
- read the appraisal
- ask your realtor for information on closed sales of similar properties
- check the tax assessor’s opinion of value on the pre-lim.
- consider the property’s worth to you if you were to buy it today.
6. Do you know how the borrower plans to repay the loan? You may find yourself in trouble if you have not inquired. Aside from which, federal and consumer protection laws insist that you inquire otherwise you may find yourself sued and your client may exonerate himself from the transaction.
7. Many investors recommend that your LTV hovers around 60% LTV (Loan To Value Ratio) to 50% LTV. Do not exceed that as collateral for any money you lend otherwise your transaction may well end up being unprofitable.
8. Did you only use “existing” improvements to establish the properties current value? You may be mistakenly including promised or hypothetical improvements into your calculations. Many beginning investors fall into the trap of arranging loans based on promises of future improvements (that either never occur or go miserably off-path). We hop you don’t fall into the trap.
9. Have you included all important clauses? Do you know who will hold the original note and deed of trust? Have you included that? Your broker can’t. (In California that is illegal).
10. Did you require the purchase and pre-payment of 12 months fire insurance premium paid in full? Have you done this escrow? Caution: Coverage could be cancelled if you allow the borrower to write a check for it outside escrow and her check bounces!
11. Always send a 90 day notice of balloon payment to all borrowers 120 to 150 days prior to the date of their balloon payment. This is not necessary but saves you a good deal of trouble and may prevent you from being sued.
12. Has the corporation’s owner also signed personally for the loan on a personal guarantor form? The borrower’s motivation to walk away without repaying you might be hindered if his own name is tagged with that of the corporation. It also immediately separates the borrowers you want from those you don’t.
Finally, always but always, run intensive checks on property value and on background and worthiness of those you intend to loan to. Can they repay you? If so how? Is property worthwhile? Will it repay your proceeds? Running these checks will involve time, but can never hurt… You’ll end with a safer trust deed investing experience.