Offline1. Is the trust deed your are to be involved being brokered by an experienced, licensed and reputable investment broker? I wouldn't consider trying to remove my own appendix! Seeking experienced professional help works better. If a broker says he'll "guarantee" your trust deed investment "in writing" against loss, legally. Although many brokers may be more than willing and some even financially able to make various verbal or written guarantees, be aware that laws may prohibit that activity (without certain, near impossible to obtain, permits). Be aware, the message is loud and clear! No one can legally assume the responsibility for the risks associated with your trust deed investments for you. Like riding in a airplane, no matter what your broker says or agrees to in writing you are still the person who's funds are at risk. Why not take the time necessary to verify your brokers track record, background or experience, and professional standing. Your number one best protection will always be your own knowledge and understanding. Money in a bank won't even keep up with inflation. Low LTV first loans against single family homes will always offer safe solid high yielding opportunities as long as people continue to live in houses so use a reputable broker and these 37 tips.
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.
10. Don't loan on a property you wouldn't want to own.