Fractionalized Trust Deeds Joffrey Long

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“The banks aren’t paying anything,
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when it comes to interest.”




Investors are tired.
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Year after year of almost no returns from bank interest mean they are not seeing the benefits they planned on as they worked and saved the money. Carefully selected trust deeds can provide a way to earn more interest income and build an investment portfolio.

Trust deed investments are secured by real estate. Most investors want to invest in first trust deeds. California first trust deeds are usually larger loans than second trust deed investments. If the real estate is located in a mid-priced to better area, the amount of the trust deed offered for investment may again, be larger.





This brings us to fractionalized trust deed investments.




We frequently close hard money loans for apartment buildings. We just closed a first trust deed secured by a small apartment building. The loan amount - $188,500. There are two ways private money investors could have participated:
  • One "whole loan" investor could have put up the entire $188,500, and been the sole owner of the trust deed.
  • Or, various investors could have acquired smaller interests in what we refer to as a fractionalized trust deeds or fractionalized loans. (This is what happened.)
  • There are other ways to offer trust deed investments in California, but we’ll cover just “one-investor” investments as in the first bullet point, and as described in the second bullet, “fractionalized trust deed investments”.



What you should know:  How do people get together and invest in one or more private money loans?




I'll cover some common steps, but bear in mind that nothing said here represents an “industry standard,” a "standard of care", or “the only right way” to do this. What I’ll describe is one common method of creating multi-lender loans. Here are the steps:
  • The loan broker or trust deed investment company, usually a licensed private money lender or other properly licensed entity, finds a loan opportunity. These are generally referred to as California first trust deed investments, assuming they’re first trust deeds.
  • California trust deed investment companies or loan brokers either fund the loan with their own money, or present the loan to investors, and the investors place funds into the escrow to close the loan with the borrower.
  • The loan broker enters into a loan servicing agreement with the investors, agreeing to collect payments, disburse amounts to investors, monitor tax and insurance payments, and provide required year-end reporting.
  • Instead of handling the loan servicing, the broker may have the investors enter into an agreement with an independent third party loan servicing company, who performs the note collection duties.
  • In the event of delinquency or default, the broker or servicer notifies the investors, and upon their agreement, instructs the foreclosure trustee to begin foreclosure proceedings, etc.
  • In most cases, there are few, if any “decisions” that have to be made by the investors. Generally, a majority of interests of the investors, (51% or more) will determine what action is taken.



Why?  What are the advantages to investing in a fractionalized trust deed?



  • Impact of a delay in payment, or non-payment by a borrower, or other collection problems is generally reduced by spreading the same amount of money over several trust deeds, rather than having a larger amount invested in one trust deed.
  • If you have $90,000 invested in one trust deed and it pays off, you are completely “un-invested” until you find more trust deeds. When your funds are invested in several trust deeds and one pays off, you only lose the interest income on that loan.
  • More time to investigate, ask questions, think and decide: A fractionalized trust deed, funded by the broker in advance, provides you more time to review and consider the investment.



Problems?
Fractionalized trust deed investments can have problems. It’s important to consider that there are risks.





These may include, among others:
  • Investor disagreement: Although the holders of a majority in interest in fractionalized trust deed investments (fractionalized loans) would make certain decisions about the investment, there are instances where investor disagreement could cause delays or challenges.
  • Failure of one or more investors to advance funds that may be needed to cure a property tax default, or to their failure to advance other funds needed to protect the investment.
  • Difficulty in selling interests in fractionalized trust deed investments: Should someone want the funds back prior to the loan paying off, a share of a loan will be difficult or impossible to sell.



This is not an offer to sell securities, or an offer or solicitation to invest in any trust deed, or in trust deeds in general.  Trust deed investments carry risk and are not guaranteed or insured. Joffrey Long is not an attorney, and this should not be considered as legal advice. Anyone engaging in any of the acts described in this writing should consult with a qualified attorney. Before considering any investment in trust deeds, you should carefully investigate a number of areas, among which are:
  • The suitability of trust deeds as an investment for YOU, based on your circumstance
  • Trust deeds in general, the risks, disadvantages and limitations
  • The provider, trust deed investment company, or broker who is offering you the investment
  • The specific California trust deeds or type of fractionalized trust deeds (fractionalized real estate loans) being offered, and their suitability to your circumstance.
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Trust Deed Investments
Joffrey Long

Joffrey has owned and operated Southwest Mortgage since 1986. He is a Past-President of the California Mortgage Association, its current Education Chair and a member of its Board of Directors. Joffrey teaches National Mortgage Licensing System continuing education courses for loan originators, and is called upon from time to time to testify as a mortgage expert witness or loan servicing expert witness.

www.MortgageExpertWitness.net

Southwest Mortgage
 17045 Chatsworth Street
 Granada Hills, CA 91344-5845

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(818) 366-5200   info@asksw.com

California Bureau of Real Estate Broker License Number 00898122


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