Trust Deeds Investing

Underwriting investments

1
Do I need to see the property before investing in a trust deed?

Yes. Directly investing in a trust deed means you should view the property first. Without personally viewing the property you will not be able to evaluate it or look at and consider comparable and recent sale in nearby areas. In a worst case scenario, if a natural disaster were to occur on a property you were investing in sight unseen the day before the deal is struck, you would be unsure about its solidity.

If it is a passive investment fund that is investing in the trust deed, this responsibility falls upon the fund manager.


2
What should I look for when I inspect a property prior to investing in a trust deed secured by that property?

First things first- inspect the property before funding a trust deed investment. Without seeing it you cannot identify in a certainty things that will matter in the long (or short) run, good or bad. Being able to visualize the area surrounding the property and the property itself will help you to have a vision and sense of calm should the borrower default. It will help you make better decisions as circumstances roll. Of course, you can see the property after default, but it is not the same as seeing it prior to this.

Underwriting investments

There are two main questions to keep in the forefront of your mind as you inspect a potential property for trust deed investment. 1) What is the property worth? and 2) would it be easy to sell the property if you needed to get rid of it quickly should the loan go into default? Getting behind the eyes of a homeowner- look for things as you inspect the property as though you were going to be living there or working there- as you inspect will help you make good decisions. Is the property and surrounding area appealing? Does the home show well? What flaws exist that can be fixed easily- think pain, carpet, hardware, etc… Are there serious structural, wiring, or other concerning issues that will affect the safety, health and wellbeing of the borrower? Hillside properties should be carefully considered, inspected for any indication of structural problems or damage, and ensure that it is not going to be expensive to fix.

When it comes to the marketability of the property, watch out for neighborhoods with large numbers of foreclosure homes. Homes in these areas will make it difficult to sell a home in this type of area. Unless dropping the price to that what is called a “fire sale” sounds appealing, but then you would not be a very wise investor. Pride of ownership should be sought after- expensive homes can be kept up with good care and this shows buyers it is a good neighborhood where people want to live.


3
How do I assess the quality of the borrower?
Investment Underwriting

It is not a good position to lend to owner- occupied homes in the state of California. The state law is very owner centric, resulting in potential delays and obstacles that can be extreme in being able to foreclose in the event of default.

If you are going to lend to investors on non-owner occupied properties, evaluation of the creditworthiness and character of your potential borrower is key. When evaluating creditworthiness, review a credit report, personal financial statements, and ask to see tax returns. What is the liquidity of the buyer? If something unexpected happens, will your borrower be able to come up with the cash to solve the issue and complete the project?

Discerning a borrower’s character is case by case, not to mention complex. This is difficult to address in a FAQ. Possessing excellent judgment and an eye for catching mismatched or unsightly (even miniscule) issues is important. If this sort of skill evades you, passive fund investing may be a better fit for you.


4
How important is the borrower’s credit? How does on read a credit report?

The quality of the borrower’s credit is very important to a trust deed investment. Some people take their commitments very seriously while others are more laze faire. A credit report, containing FICO scores will give you a tool for determining creditworthiness. For more information on this topic, visit Wikipedia.com

Also, it is important to view personal financial statement(s). The following is FAQ addresses this.


5
What is a personal financial statement?
Trust Deed Secured Property

Personal financial statements are quick, overall photos of the assets held by an individual. These can be things such as cash, automobiles, real estate, and securities. It also shows their liabilities- other mortgages and owned real estate. Net worth can be determined by this too; net worth is the difference between assets and liabilities.

Personal financial statements are required prior to a lender deciding to continue in the loan process, or not. This piece of information reveals much about the potential borrower. Some questions will be raised along these lines: is this potential borrower purchasing and driving expensive vehicles (new) even though the net worth they have is small? Is the leverage on each asset maximized? Good borrowers show that they are not trying to get as close to the cliff as possible. Multiple liquid assets are excellent signals that a lender looks for.


6
What are points?

This term is referring the origination fees that are charged by privatized or hard money lending companies when the loan is actually funded. A point corresponds as 1% of the loan amount. On a loan of $400,000 with a fee of three points, the fee would be $12,000. For a high quality loan from this type of lender, it is common for a one- three point fee to be charged. The loan is considered higher risk the higher the points, some even soaring above 5.


7
What is a prepayment penalty and why do they exist?
Requirements from the Underwriter

Simply put, a prepayment penalty is assigned to the payment of a loan before its due date. To enhance returns, hard money lender often charge prepayment penalties. Sometimes this penalty will be as little as a single month’s amount worth of interest or multiple(s) of the interest amount. The excuse given for this practice is that prepayment will cost the lender time and energy in the re-deploying of the money that was paid off prior to the schedule pay off date.


8
What happens when a loan pays off?

Firstly, it is a great thing that the investment was successful! But, an investor now has cash sitting that is earning usually less than 1%, sometimes 1%. Trust deed investors usually being sourcing new investments as individual investments pay off.

Fund managers take the responsibility for keeping the money working if it is a managed trust deed investment fund. Having too much cash at a given time can create lag on returns from the fund.


9
What is the role of the loan servicer?

The loan servicer exists to collect payments of interest from the borrower and distribute them to whoever the lender is. Loan servicers are also the initiating party in the foreclosure processes, by request of the original lender, if default occurs by the borrower. We are of the biggest and most reputable servicers for trust deed investing in California.

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