Recent News and fundings

 

Trust Deed Investment Closed in Carson, California

March 22nd

A hard money loan recently closed on a home in Carson, CA.  The trust deed investment is at 12% and here are the details: Loan amount: $160,000 Appraised Value: $338,000 Loan to Value: 47.337% Monthly Payment to Trust Deed Investor: $1,600.00 Term of loan…

Trust Deed Investment Closed in Moreno Valley, California

March 21st

A hard money loan recently closed on a home in Moreno Valley, CA.  The trust deed investment is at 12% and here are the details: Loan amount: $75,000 Appraised Value: $125,000 Loan to Value: 60.000% Monthly Payment to Trust Deed Investor: $750.00 Term of …

Trust Deed Investment Closed in Los Angeles, California

March 20th

A hard money loan recently closed on a home in Los Angeles, CA.  The trust deed investment is at 12% and here are the details: Loan amount: $200,000 Appraised Value: $340,000 Loan to Value: 58.824% Monthly Payment to Trust Deed Investor: $2,000.00 Term of…

Trust Deed Investment Closed in Yucaipa, California

March 19th

A hard money loan recently closed on a home in Yucaipa, CA.  The trust deed investment is at 9% and here are the details: Loan amount: $68,000 Appraised Value: $112,000 Loan to Value: 60.714% Monthly Payment to Trust Deed Investor: $510.00 Term of loan: 8…

Trust Deed Investment Closed in Moreno Valley, California

March 18th

A hard money loan recently closed on a home in Moreno Valley, CA.  The trust deed investment is at 9% and here are the details: Loan amount: $69,000 Appraised Value: $115,000 Loan to Value: 60.000% Monthly Payment to Trust Deed Investor: $690.00 Term of l…

 

The Silver lining in a Bad real estate market

California’s tortured real estate market has brought heartbreak and ruin, but some investors, speculators and first-time home buyers are also dreaming big and finding opportunities — a silver lining in the Golden State’s epic housing crash.

For many young couples, plummeting prices and near record-low interest rates make it possible to own a home in California for the first time.

Investors and real estate speculators, meanwhile, can snap up foreclosed properties on the cheap to sell during the next boom in California’s boom-and-bust real estate cycle, a boom they believe is inevitable and possibly not far off.

“This is the buying opportunity of our lifetime,” said Timothy McCandless, who heads an investment group that expects to purchase some 100 homes this year in Southern California’s Inland Empire region.

California — which would be the world’s eighth largest economy if it were a country — saw a near-doubling in home sales in the fourth quarter, a pace surpassed only by Nevada’s 133.7 percent growth.

But experts warn it’s a dangerous game to play when nobody is really sure how low home prices will go or when they will rebound as the recession lingers, jobs dry up and residents pour out of the state in search of better prospects.

Norris concentrates on the Inland Empire of Southern California, made up mostly of Riverside and San Bernardino counties, one of the fastest-growing areas of the country during the housing boom, driven partly by immigrant families who couldn’t afford pricier coastal cities.

It’s now one of the hardest-hit. In the past 18 months, the median home price in Riverside and San Bernardino, pummeled by the subprime meltdown and now recording some of the highest foreclosure rates in the state, has plummeted 55 percent.

Cal Western Investments looks for homes built between 1980 and 1990, typically under 2,000 square feet (186 sq meters). Older houses come with too many maintenance “surprises,” McCandless says, and larger places can be tough to sell or rent in hard times.

Last month the group paid $55,000 for a foreclosed home that was worth $360,000 at the top of the market. Norris expects to spend $30,000 on repairs and rent it for $1,200 a month until the market turns around.

The group also hopes to minimize risk by owning the homes free and clear, thus accruing little debt.

“You cannot have this (low) level of pricing be permanent because it costs too much to build a home here,” Norris said. “That’s how you know you’re making a logical decision when everything is falling around you. When you can buy a finished product someone will want to live in for $55,000, that just has to make somebody pretty wealthy someday.”

‘DARK MOMENTS’

Experts agree California home prices will ultimately rebound but caution that real estate investing in this economy — the worst contraction since 1982 — should not be undertaken by amateurs or the faint of heart.

“You have to have a pretty strong feeling about where this is all going,” Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles, he said. “This cycle is so different from prior cycles that it’s very difficult to extrapolate.”

“Most would argue that California is not going into the sea,” he said. “On the other hand it’s not totally out of the question that this particular period of weakness could extend for a while, and that means multiple years.”

California’s roller-coaster real estate cycles can be traced to the 1970s, when home prices tripled, ignited in part by foreign investment and the end of the gold standard following decades of explosive population growth.

Home prices plunged in the early 1980s, turned around and doubled within 10 years, slumped in the mid-1990s and then blasted off again at the end of the decade. The subprime meltdown and recession pushed them back off the cliff.

“It’s a great time to buy for people who are willing to risk a little more and be optimistic when everybody else is doom and gloom,” said Daren Blomquist, marketing and communications manager for RealtyTrac, an online foreclosure data service.

But he warned: “They will probably have to wait it out, possibly for several years.”

Chris Twoomey and his wife Jennifer illustrate the risk underlying the perceived opportunities. They moved to California from the Midwest in 2004 to pursue acting careers and had just begun to think the dream of home ownership was out of reach when the crash came and they saw their chance.

The couple pounced in January, right after Jennifer, 39, learned she was pregnant with their first child, making an offer on a small, bank-owned home in suburban Los Angeles.

But the day after the Twoomeys’ offer was accepted, Chris was called into the cafeteria at his job in a cosmetics company warehouse and laid off.

“Sometimes in our dark moments we sit around and say to ourselves, ‘Look, forget the acting, forget everything, this is the time to bail’ (from California). We can be doing this someplace else that’s still warm but doesn’t cost as much,”

“But we’re sticking it out,” he said. “It’s perverse, but something inside of us does want to stay here. It’s sort of a belief that because it is Southern California and because it is the kind of place where everybody wants to be, it will come back eventually.”

Trust Deeds as an investment (Be the Bank)

Introduction

Chapter 1

• Cal Western Funding
• Cal Western  Funding and Trust Deed Investing

Chapter 2

• The Basics of Trust Deeds
• The difference between trust deeds and other investment types

Chapter 3

• Typical Borrowers

Chapter 4

• Legal Issues for Investors
• Real Estate Law
• TILA – Section 32

Chapter 5

• Loan Underwriting
• Loan-to-Value
• Borrowers

Chapter 6

• Title Insurance

Chapter 7

• Collection and Distribution of Loan Payments

Chapter 8

• Lien Priority

Chapter 9

• Loan Documents
• Information Regarding Notes
• Construction Loans

Chapter 10

• Escrow
• Escrow instructions
• Important facts about escrow to keep in mind
• Closing Escrow

Chapter 11

• Loan Enforcement
• Foreclosure
• Bankruptcy

Chapter 12

• Pitfalls for Investors to Watch For

Chapter 13

• Frequently Asked Questions

Conclusion

Chapter 13

Frequently Asked Questions

Since you are new to mortgage investing, you may have questions in regards to what it is, what it can do for you, and if mortgage investing is really worth it in the long run.  While all of your questions may not be answered, the following is a short list of the most frequently asked questions that pertain to mortgage investing, and should provide you with a good idea of what you can expect.

What is the Mortgage Investment Yield?

The standard yield is 11 – 14% per annum.  However, it is not uncommon for some mortgages to have higher yields.

How long is a Mortgage Investment Term?

You have complete control over the term of the loan.  While some loans can have a 15 year term, many have a three year term or less.  Ultimately, the choice is yours.

Is a Mortgage Investment Safe?

Yes!  In fact, of all the investments you can make, mortgage loans are rated as one of the safest.  For this reason, home interest rates are far lower in comparison to credit card rates.  Private money loans are generally based on the real estate value itself, to the degree of the individual borrower’s credit.

Is a Mortgage Investment Liquid?

A mortgage investment is not as liquid as a stock or bond.  That being said, it is recommended that you only invest money you will not need returned to you quickly.

How much money is required to make a Mortgage Investment?

To give you a general idea, most mortgages range from $10,000 – $50,000.  However, you are in complete control over your investment, because you are the only one who owns your mortgage.  The closing should occur at your attorney’s office, or at a Title Company.  Make sure you obtain title insurance and an independent property appraisal, as well as other significant documents that are required.  Your check should be given directly to your attorney or the Title Company.

Is a Mortgage Investment more Trouble than it’s Worth?

No.  With a mortgage investment you have control over when you receive your checks, which allows you to obtain your money as quickly as possible.  Furthermore, if it is your wish to not be in direct contact with the borrower, simply set up your mortgage investment plan with a third party, such as a collection firm or your bank, and they will collect the payments and contact the borrower on your behalf.

What about IRA’s and other Retirement Programs?

A mortgage investment is a great investment for your Pension Plan or self-directed IRA (Individual Retirement Account).  The reason is because if you use your Pension Plan or IRA, your income is tax deferred and can increase faster, as you will not have to pay taxes so you will have more money for gaining interest.

Are their Precautions I should take?

First and foremost, you need to familiarize yourself with the meaning of Loan to Value (LTV).  Remember, all things being equal, the greater the Loan to Value, the more risky the loan.  LTV is the percentage of the loan to the property value.  Therefore, a $70,000 loan to a property worth $100,000 has a 70% LTV.

Most lenders are in agreement that on certain types of loans, you would require a lower Loan to Value.  Loans that involve the least amount of risk are those to –

® Homeowners living in their own home

® Second homes

® Rental properties

® Commercial properties

® Vacant Land

While most lenders will only lend 50% or less of the actual value of vacant land, it is also true that many lenders will not lend to corporations or trusts.  Thus, it is highly recommended that if you do decide to lend to either of the above mentioned entities, you require a larger money down payment and/or a lower Loan to Value.  In addition, it is highly recommended that you always insist the Borrower takes personal responsibility on the promissory note.

Conclusion

By now you should have a good understanding of what is involved when it comes to trust deed investing, and should feel confident that with the knowledge you have in your possession, you can properly assess the risks involved.  In addition, you should also have a good idea of what to expect from your mortgage broker, and should be able to make educated decisions in regards to the loans you wish to invest in.

Don’t forget, the more you learn about trust deed investments, the safer the risk and the higher the potential for excellent return.  Thus, make the effort to keep these seven trust deed investing tips in mind when you are making an investment:

1. Know the market value and equity of the real property, as well as your loan security.

1. Know your borrower’s financial status and their credit worthiness.

1. Understand the escrow process.

1. Find out the experience, knowledge and integrity of the broker with whom the transaction will be arranged or made.

1. Keep all documents and important papers that describe, and provide evidence and security for the loan, in a safe and accessible place.

1. Know how to recover your investment when the borrower does not meet payment.

1. Understand loan servicing authority, provisions and compensation.

Always remember, although trust deed investments are one of the safer investment risks you can take, and have the potential to provide you with high return, ultimately the risk is yours.  That being the case, you may find it in your best interest to first speak with a qualified professional or a mortgage loan broker before you make any commitments with your money.

Chapter 12

Pitfalls for Investors to Watch For

 

Although a trust deed investment is one of the safer investments you can make, it is imperative that you understand there are still risks involved.  The best way to ensure that you avoid pitfalls is to learn as much as you can about trust deed investing and everything it involves.  However, to give you an idea of some of the pitfalls you should watch out for, the following are a few tips:

 

It is always in your best interest to physically inspect any real estate you are intending to invest in, even if the property has already been checked out by the appraiser, broker or title company.

 

Take the time to establish your personal opinion regarding the value of the real estate collateral.  You can do this by using a number of approaches such as:

®         Ask your realtor for information on closed sales of comparable properties

®         If you were to purchase the property today, what would it be worth to you?

®         Read the appraisal

 

Take the time to learn the difference between personal and real property.  You don’t want to confuse personal property for real property when you are establishing your opinion in regards to value.  Real property is that which is considered to be “affixed to the earth”.  However, don’t mistake all property that is fastened to the ground to be real property; some of these items are personal.

 

You should make it a point to know how the borrower is planning to pay the private money loan.  Just because short term loans are primarily funded based on real estate equity, you should discover what the borrower has already pre-approved for their take out loan.

 

When it comes to Loan to Value Ratio that concerns homes occupied by owners, you should never lend out a LTV that exceeds 60%, even if the home appears to be the most ideal of owner occupied homes.  Likewise, as far as non-owner occupied homes are concerned, the LTV should not exceed 50%

 

You should never rely on future promises regarding improvements unless the proper draws for the upcoming work that is to be completed is officially set up.

 

Make sure you do not want or require any final, additional documentation before you close.  Such documentation can include, but is not limited to following:

®         Certificate of occupancy

®         Well report

®         Proof of purchase cost

®         Notice of completion

®         Closing statements

®         Roof reports

®         Toxic reports

®         Sign off of final permit card

®         Etc.

 

Take the time to research everything you can about trust deed investments.  Speak to qualified professionals, and don’t be afraid to ask questions, or rethink your decisions before making an investment.  By following these guidelines, you will lower the risk you take when making a trust deed investment, and will be less likely to experience a pitfall.

Chapter 11

Loan Enforcement

 

 

While it is true that trust deed investing is one of the safer ways in which to obtain an excellent return on an investment, there is always the chance that the borrower may default.  When a borrower fails to pay their debt or violates the agreement, there are ways in which the investor can remedy the situation.  This remedy is a process known as foreclosure, and simply put; it is the process through which the property in question is sold in order to satisfy the debt owed to the lender.  (Note:  Keep in mind that each state may have their own process of foreclosure, so the following information may not apply to your area)

Foreclosure

 

There are two types of foreclosure processes that are used in regard to trust deed investments:

 

1. Judicial Foreclosure – this process is the more costly method and is when the courts are utilized to foreclose on the property, and an attorney is required.

 

1. Non-judicial Foreclosure – This process is usually simple and fast, and is the one that is commonly used for trust deed investments.  A non-judicial foreclosure can be handled by just about any title company or an independent foreclosure company that has a good reputation.

 

When beginning the non-judicial foreclosure process, there are certain documents that the investor will be required to give the foreclosing officer.  Some of these documents include the original or conformed copy of the recorded trust deed and the original note secured by the trust deed.

 

In addition, the agent will request a written statement regarding the default amount, the date up to which the interest is paid, the due date of the payment, and the unpaid principal balance.  As soon as the officer obtains all of this information, they will then be able to organize the foreclosure documents and prepare for the process.

Reasons why foreclosure is initiated

 

There are a number of reasons for foreclosure, including both monetary and non-monetary reasons.  As far as monetary is concerned, the defaults include are as follows:

®         Nonpayment of a balloon payment (when all the payment is due at one time)

 

®         Nonpayment of a due monthly amount

 

®         Advancements for each provision of the trust deed in regards to nonpayment of a senior lien, which would jeopardize the position of the foreclosing trust deed

 

®         Advancements for each provision of the trust deed in regards to insurance or taxes.

 

As for a non-monetary default, reasons for foreclosure could include an acceleration clause default because the borrower transferred the encumbering or title property in violation of the provisions outlined in the deed of trust.  Another reason is the borrower destroyed the property value by removing or demolishing the building(s), or by failing to keep the property in top condition.

 

Necessary documents for foreclosure

 

There are documents that you will require in order to begin the foreclosure process and include the following:

 

®         Declaration of Default (DOD) Notice of Breach (NOB) and the election to sell under the deed of trust.

 

®         Subsection of Trustee (SOT) (required if there is any officer other than the initial named trustee) or Non-military affidavit (required if an individual)

 

Under the beneficiary’s instructions, the foreclosure officer will prepare the above documents.  Once prepared, the officer will have all beneficiaries involved sign the DOD, NOB, SOT and the Non-military Affidavit with the attached notarization.   Note: Property can also be foreclosed by a senior lienor or through a deed in lieu.

 

Trustee Sale

In a non-judicial foreclosure, the trustee has the power to advertise and sell the property to a bidder.  The successful purchaser receives a signed trustee’s deed, which is recorded at the county recorder’s office by the trustee under the trust deed.  After the sale, there is no equitable right of redemption to the trustee or any other possible junior lien-holder.

 

When all is said and done, the entire foreclosure process takes approximately 110 days to complete (usually 90 days for the redemption term and 12 more for the advertising).  It is usually common for foreclosure to start, but does not carry all the way into sale.  The reason is because when an investor takes the foreclosure action, the borrower often realizes the seriousness of the matter and will make the effort to make the agreed payments on time.

 

 

Bankruptcy

 

Sometimes, in order to avoid the selling of their property through foreclosure, a borrower will try to obtain protection from what is known as an “automatic stay”.  In short, the borrower will file a petition for bankruptcy.

 

A bankruptcy petition that is filed in a federal bankruptcy court before the foreclosure sale of property stops the trustee, in a foreclosure process, from selling the property until the automatic stay is lifted.  At this time, a Temporary Restraining Order will be set in place and will delay the trustee’s sale until the state court can determine whether or not a preliminary injunction will be granted, until a trial or a full hearing can take place regarding the matter.

 

When it comes to bankruptcy, the investor will require the assistance of an attorney to appear in court, in order to request that relief be granted from the automatic stay.  An attorney will also be required to respond to the Temporary Restraining Order.

 

Should a borrower file for bankruptcy, it is always in your best interest to respond as quickly as possible to ensure that you receive full payment of the amount owed to you. This includes all legal costs, fees and expenses that you had to endure while processing the foreclosure, as well as those costs linked to having to take action in responding to the bankruptcy petition.

Chapter 10

Escrow

 

 

When you fund a loan or purchase a promissory note, this transaction should be done through escrow.  Escrow is a specific process in which a title of transfer and a funds transfer take place via a neutral third party during a real estate transaction.  The company providing escrow acts as the middle person in the transaction, and the escrow agent is the one who will process the transaction in accordance to the initial escrow instructions that were agreed on by the lender and the borrower.

 

The instructions provided by escrow determine the conditions that need to be met or waived before the escrow officer can take action and disburse your money to either the note holder or the borrower.  Some of these conditions include, but are not limited to –

 

1. Delinquent taxes are paid
2. Certain liens are removed
3. Choosing title insurance coverage
4. Completion and handing over of the deed of trust or promissory note, or the completion and handing over of the endorsement or assignment of the promissory note.

Escrow instructions

 

Due to the fact that escrow usually involves the transfer of an investment in land, all conditions regarding the transfer need to be in writing.  That being said, the following is a list of the criteria that is required to be stated within the escrow instructions:

 

1. Name of the escrow agent, third party or depository
2. Names of both the buyer and seller as well as their proper title (ex: joint partnership, corporation, individual person, and so on)
3. A legal description of the property that is to be transferred
4. The price at which the property was purchased
5. Set conditions in regards to transfer and payment
6. Distribution of cost, insurance costs, taxes and assessment
7. The signature of both the seller and buyer

All of the transaction details, including the agreement made by the seller and buyer, need to be written in the escrow instructions so that it is clearly understood by all parties involved.  Even promises made orally should be written down.

 

When the instructions have been completed, it is then important for the investor to read the preliminary title report more than once to ensure that everything is understood and nothing has been overlooked or missing.  The investor (you) should also check and see that the trust deeds and notes, as well as the amount of indebtedness are all in proper order.

 

If the investor has the first deed of trust, then there will be no other lien before theirs.  Furthermore, the investor should also make it a point to ask questions in the event they discover certain wording or restrictions they fail to comprehend.  Should this occur, the investor should ask the escrow agent to produce copies of the listed documents in the title report.  As an investor, you should never feel embarrassed to ask questions.  Remember, only through asking questions will you learn all the facts of purchasing a trust deed.

Important facts about escrow to keep in mind

Legal advice –

Be advised that while an escrow company will assist you, escrow’s purpose is not to provide advice on legal matters.  Nevertheless, an investor may ask the advice of a broker or escrow company, and they may or may not tell the investor how a similar problem was resolved in past escrows.  However, if an escrow involves tax and legal problems and is extremely technical, than the investor should seek the advice of an attorney.

Casualty and Fire Insurance –

Insurance is imperative when it comes to making a trust deed investment; because as an investor you will want to ensure that you have sufficient insurance to protect your investment.  The investor should check with the escrow agent to ensure that when the close of escrow occurs, an endorsement will follow.

Notice request –

A notice request must be placed in the agreement to make sure that the investor will be notified should a default action start on one of the previous loans.  If in the event the investor held a second deed of trust, and the initial trust deed holder began a foreclosure action, the investor would receive notification.  The reason why such foreclosure actions are started is due to the fact that payments on the promissory note have not been made, or it could be that taxes and insurance are overdue.

 

Include important conditions –

Should a late charge be included as part of the note, the investor needs to ensure that the conditions regarding the late charge, are included in both the escrow instructions and the note.

Acceleration Clause –

An acceleration clause should be apart of the escrow documents.  This clause indicates that full payment of the loan is required to be made upon liens, change of ownership or a transfer.

Escrow number –

Should it become necessary in the future, for the investor to discuss a section of the escrow with the agent in charge, if the investor has the escrow account number it will be easier for the agent to locate the escrow file in question.  Furthermore, it is in the investor’s best interest to safely secure the escrow agent’s card, and inset the escrow number on it.  Thus, this will ensure that the investor has the escrow number, the name of the escrow company, as well as the name of the individual responsible for the documentation.

 

To make things easier, investors should keep all loan escrow documents/papers in a single folder, and to ensure the protection of the original deed of trust and note, secure these documents in a place safe from theft, fire or other potential hazards that could lead to their loss.  Finally, the investor should make copies of all the important documents (for example- escrow instructions, trust deed, promissory note), and keep them at home where they can be easily accessed and referred to when needed.

 

Obtain certified copy of escrow papers –

The investor needs to obtain a certified copy of escrow papers, which is an escrow file that has been verified and signed by an agent of the escrow company and is considered to be a valid and accurate copy of the original document.  Once the investor has the certified copy, the escrow company recognizes that the investor expects all conditions and terms of the escrow to be completed precisely.  A certified copy of escrow papers is especially important when it comes to cash transactions where the investor wants to ensure the trail of cash is carefully documented.

Closing Escrow

 

Once you have completed all of the necessary instructions and requirements for escrow, and it begins to take its normal course, you are now ready to close escrow which is often referred to as “close of escrow”, “closing” or “settlement”.    Regardless of the term used, the closing of escrow is when all of the final papers are signed, and the closing officer is prepared to record the deed to the property, and the sale goes to the seller.

 

The instructions for escrow that you will be requested to sign could be unilateral (separate set of instructions for the buyer and separate ones for the seller) or bilateral (one set of instructions for the seller and one for the buyer).  Different areas use different methods.  Those that use unilateral escrow instructions generally sign at the end of the escrow term, while those that use bilateral escrow instructions usually draw up and sign in the initial opening of escrow.

 

Be advised that once the escrow documents have been signed, if you try to cancel, regardless of the reason, you may be subject to penalties or even legal consequences.  Therefore, it is imperative that you carefully read and re-read all the closing documents.  Double check the documents for clerical or mathematical errors.

 

Sometimes issues may arise that can cause a delay in the closing process, such as one party may be not be able to sign the papers at the closing time, because they are unavailable.  Although this can be a problem, it is one that can be dealt with in several different ways such as:

 

1. The documents can be sent to the unavailable party ahead of time and pre-signed.
2. A power of attorney can be implemented to allow another individual to act on behalf of the absent party and sign for them.

 

When everything is in the clear, and the documents have been appropriately signed, the escrow officer will inform the title company to record the trust deed, who will then deliver the loan package (all the executed loan documents) to the lender.  As soon as the lender is in possession of these documents, they will then release to the title or escrow agent their loan proceeds.  The title attorney or escrow agent will ensure that the exchange of documents and funds runs smoothly.

 

Thus, escrow closes when every condition of the escrow instructions have been met or waived, the documents have been recorded, and the funds have been released.  A closing statement will be sent to you, which describes how and to whom the documents and funds were distributed.

Chapter 9

 

Loan Documents

 

 

There are different loan documents that secure an investment.  However, regardless if you are loaning money on real property as security, or are investing in a deed of trust, the documents you would require for both are the same; you would require the trust deed and the note.  The trust deed is what will secure the repayment of funds that are owed according to the conditions of the note, and will then become a lien on the property.  The note, on the other hand, shows the initial amount that is owed based on the terms and conditions regarding the repayment of the trust deed.

 

While all notes function with the same end in mind, there are different types of notes that can be obtained.  The following is a list of notes:

The Promissory Note – This is a common note, and as the name suggests, it is the borrower’s written promise that they will pay a specified amount of money, installments of money, or money on demand to a named person, in the future, at any given time.

 

The Amortized Note – the amortized note is often used for real estate transactions.  It requires that the borrower usually make regular monthly payments of interest and principal throughout the period of the loan.

 

A Holder in Due Course Note – This particular note is in reference to an individual who is the innocent buyer of the note for value, and was oblivious to any defects that existed within the note when purchased.  The holder of this not is protected by the law, as they are considered to be in good faith holding this negotiable note.

The Straight-Interest-Only Note – The straight-interest-only note, is one that does not require payments of principal during the life of the loan.  The interest payments are considered negotiable, but generally they occur as monthly payments.

 

Recourse Note – For this note, the endorser is making a guarantee that the payments will be given to the present holder, as well as all the other holders.  That being said, a person may choose to recourse a note so that the payment goes to one individual in particular and no one else.  As an endorser, one should be cautious when using this note, because the payment liability is extensive.

 

Note Without Recourse – If this note is written above the signature it implies that future holders will not be guaranteed payments.

 

The Demand Note – This note is used only on special occasions and is subject to be called in at any time for full payment.

 

An “or more” Note – some notes feature an “or more” clause that is located near the payment amount.  This “or more” clause enables the borrower to rightfully increase their monthly payments when they choose, as well as the right to fully pay off the loan without being subject to penalty.  However, if both parties involved in the loan agree, the “or more” clause can be deleted by simply having an escrow agent omit the objection.

 

Information Regarding Notes

 

You need to understand that while some notes can be negotiable, others are not.  In order for a note to have negotiability, the note must have the option of unconditional promise to pay, without contingency, which is based on the future actions of the borrower.   A negotiable note must provide a set sum of money for the payment at a specific time, and must be payable to the holder.   However, the vast majority of notes are transferable through endorsement.

What if a note is lost?

If you lose a note, it will need to be replaced.  The reason is because the original note is not a recorded instrument, like the trust deed.  Thus, even if you have a copy of the original, it will not suffice because only the original note is considered to be the life of the transfer.  Losing a note is a problem that is also quite costly.

 

The best way to replace a note is for the two parties to come together and sign a new note.  If this action can not be performed, it may become mandatory that you seek the service of an attorney.  An action must be filed in court to reconstruct or restore the lost note.  Although, in some cases, depending on the state, sometimes the issue of a lost note can be resolved by means of a lost note affidavit.

 

In order to keep your original note and deed of trust safe, you should place them in a safety deposit box at your bank.  However, make sure you make copies of both documents, so you can have them on hand, and refer to them later for future use.

 

Construction Loans

 

There are different construction loans that can be invested in.  For instance there are:

 

Improvement and Renovation Construction Loan – this loan is funded to enhance the value of property based on upgrades and modifications.

 

Ground-up Construction Loan – This loan is one that assumes the borrower has approvals and a completed set of plans which are sufficient so that construction can begin once the loan has been funded.  With a lender approved draw schedule, the proceeds of the loan may be funded over a certain amount of time.

 

Infrastructure Construction Loan – The proceeds for this loan are used to give the borrower the chance to develop and complete the infrastructures of the property, prior to the start of ground-up construction.  The use of such loan proceeds can fund the installing of utilities, water pipers, sewers, streets, gutters, curbs and related utilities.

 

With a construction loan, there are certain aspects that must be followed to ensure that everything goes according to plan.  For instance, the lender needs to consider inspections and lines.

 

Inspections to Protect Investment – It is imperative that frequent inspections are conducted in order to protect the lenders investment.  This protection is made possible by the coordination of project funding with the lender.  Through reviewing and maintaining plans, as well as specifications that are relevant to jobs.  Furthermore, contracts are reviewed to make certain that borrowed funds are sufficient to complete the project.

 

With this type of documentation at their disposal, the company in question can have complete control and account for construction funds from the start of the project until completion.  Routine inspection reports of the construction site are prepared by an in-house inspector.  This report details items that have been completed and are still under construction.

Preliminary Lien Notice – With a construction loan, most states will require that a preliminary lien notice be sent to the lender, general contractor and owner before, or on labor services or material provided by the subcontractor/material supplier.  Once this notice has been sent, the subcontractor has been given the right to lien a project.  A construction control company that is well managed will ask each party involved to send their copies of all notices.  The purpose of this procedure is so that those who supply the services and products, as well as those who are the subcontractors working on the project, can be tracked.

 

Finally, when it comes to a construction loan, construction control is imperative to any construction project.  Prior to the hiring of a control company, its disbursement policies must be looked into.  You need to understand that not every company functions the same.  For instance, while some companies will consider themselves control companies, the actually disburse the funds directly to the owners or general contractor, without first making certain that the subcontractors and material suppliers have been paid.  To be on the safe side, it is always in your best interest to ask whether or not a construction control company is used.

Chapter 8

Lien Priority

 

 

You may or may not be aware, but a deed of trust is actually a lien on a piece of real property.  What is a lien?  A lien is a legally recognized claim or hold against one person’s item by another which utilizes this item as security for a duty, debt or obligation.  If there is more than one lien on a piece of real property there could be a number of reasons for this.  Some of the liens an investor may encounter include:

®         Tax liens

®         Mechanic’s liens

®         IRS liens

®         Judgment liens

®         Etc.

 

A few interesting facts about liens

It is important for you to know that liens in first priority are the most ideal.  Therefore, in order to obtain this priority, this needs to be verified before the closing of escrow.  In order to obtain the accurate information that is required to verify the priority of the deed of trust, you will find that Title insurance policies will provide you with what you need to know.

 

If it happens that an error is made, or a lien has been overlooked and such aspects affect the trust deed holder, then the holder can take legal action against the company that issued the title insurance policy.

 

When the holder is in possession of the priority lien, they can foreclose and any junior lien holders won’t be able to stop it.  That being said, there are ways in which junior lien holders can protect themselves should this happen.

 

To begin with, they can make certain that their lien has been accurately recorded with the county recorders office.  They can also inform all senior lien holders about their lien, and ask them for written notification before they foreclose.

 

 

Tax Liens

Tax liens have priority over deeds of trust.  This is a fact you won’t want to forget should a tax lien appear.    Thus, in order for the investor to protect themselves in the event of a tax lien, a provision should be added in the trust deed and note that explains if the borrower and their property have or will receive a tax lien; it is the trustor’s responsibility to contact the investor.

 

In addition, the note should provide the investor with the choice of needing the payoff, so that they can protect their principal from foreclosing on the tax lien.