Following is some basic information on being a Trust Deed Lender. This information was learned over the past 40 years of real estate investment and some items were learned at a high cost. The guideline provides tips and good advice about how to go about investing in Deeds of Trusts and earning high yields on well-secured first position Loans. Remember, it is your money, you can walk from the deal, and there are plenty of deals out there.
Are you 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 Deed of Trust? Ask if they have any other assets to use as collateral for the loan. Motor home? Jet plane? Gold? Diamond? You will be surprised at the answer and sometimes the answer is yes. If they have additional collateral GET IT!
How is the borrower going to pay off the Loan in 6-24 months? What is their exit plan to get out of the deal and pay you back? Sometimes the borrower will say that when the home is finished, they plan to move in and make it their primary home. Will they do a refinance and pay you off? Can they do this?
Ask yourself, can the borrower complete the deal or pay the Loan? Really, do they have the income and cash to complete the deal? If the borrower is in the fix/flip business do they have the experience to get the home completed? Are they going to do sweat equity and do it their selves? Do they have the necessary skills to fix up, market, and sell the home? Where are they getting their money from?
Everyone wants to be in the real estate business of buying and selling homes for profit. It is on TV, radio, and their weekly seminars that will show you how to make big bucks in the real estate market. New investors will go out and buy the property and want you to be the lender on the deal. They want you to be their dream cash provider. As the lender, you need to make certain that you do not get caught up in the hype of making money deals and protect your investment.
Following are some Do not:
- Do not lend to inexperienced individuals. What is experience? Real Estate License, prior flips, contractor license, amount of education (did they graduate from college?)
Do not’ lend unless they have their OWN cash in the deal. If you are lending 60% where is the reaming 40% coming from? If they need to make improvements, where is the cash coming from? Ask to see bank statements. Maybe they are going to borrow the money on a credit card. Do not lend to them.
- Do not lend if you do not like the property. When you get a bad feeling about this, it is your Guardian Angel talking to you. Listen to the Angel and do not do the deal.
- Do not lend to bad people? What are bad people? The best indication of the quality of the borrower is found in the credit report. Get one and read it. But what is bad? Look at the report and see what is causing the low score. A foreclosure on the record can be scary, but the borrower, maybe starting to improve. When you are looking at the investment, more weight is placed on the Loan to the value and condition of the property. And with a good LTV ratio, you should be adequately protected, but you need to go beyond the credit report. Try to evaluate the ‘moral fiber’ of the borrower. Foreclosure is bad, but are there other items on the report? Did they try to resolve the credit issue or did they ‘skip and run’? Who did they burn? A foreclosure or short sale is common but skipping out on credit cards not paying Pizza Hut for a bad check, or not paying a $25 phone bill, is an indication of someone who really does not care and won’t care about you. Do not lend to low ‘moral fiber’ people.
- Do not lend unless you Google their name. You will be surprised as to what you find.
- Do not lend to relatives or friends. Do not do it.
- Do not lend unless you are certain that the combined total of all real estate Loan proceeds plus any other financing or and other 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??
- Do not lend on Future Value. The future may not come as you expect it. Only lend on current value, not someone’s future dream. What will your equity position be if no improvements are never made to the property? What is value? It is the value of the property? The value of the property is its current value as it stands NOW. Do not be sold on the future improved value. Only lend on what is -- not what will. Borrowers will say for example that when the home is completed the value is $500,000 based on an LTV ratio of 60% so you can lend $300,000. However, as the home stands today, its current value is $100,000.
- Do not lend on future value. Never lend on a promise to do something.
Remember it is our money you are lending, and you always must consider the worst-case scenario from the borrower. You must be prepared to foreclose and take the assets back to protect your investment. You need sufficient cash reserves to complete the foreclosure and resell the property.
Dennis "Love" Dahlberg
Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383
Dennis Love Company LLC
Arizona Tel: (602) 529-4800