Q: What are the benefits of trust deed investing?
A: Trust deed investing offers an unusual combination of high returns and consistent cash flow with a secured investment. Investors receive monthly interest payments on their invested capital as they would with a fixed income investment or money market fund, but the yields are typically higher. And, because the loans are secured by real estate, the risk is relatively low.
Trust deeds also offer a vehicle for investing in real estate without the need to manage property. They're an excellent way to diversify a portfolio. Plus, unlike publicly traded real estate related securities – e.g., CMOs, MBSs, REITs – trust deed investments are straightforward and easy to understand.
Q: What exactly is a trust deed?
A: A trust deed (or a deed of trust) is a document filed with a county recorder's office indicating that there is a loan against a property – creating a secured lien on the property, providing collateral for the lender or lenders. (Terminology may differ outside of California – some states may use a mortgage instrument, for example – but the filing of some sort of lien is typical when mortgage loans are provided.)
Q: What are trust deed investments?
A: Trust deed investments are opportunities for individuals to provide mortgage loans privately, working through a licensed intermediary like ExpressLoan.
Q: Why haven't I heard of trust deed investing before?
A: Most private money trust deeds are created by small mortgage companies, and are not typically sold or securitized on the secondary mortgage market – a prerequisite for trading in mainstream markets. This, combined with their smaller volume, makes them unattractive to large financial services firms to market to the masses – even though investors can benefit from awareness of these opportunities.
Q: How do these Investments perform?
A: Research statistics show that averages of 38% of all private mortgages/deeds of trust have occasional late pays, creating additional income for investors through late payment fees. However only 7% reach the default stage and only 2% reach the foreclosure stage. This means that although a borrower may have difficulties making a payment, they usually remedy the past due payment, plus late fees, plus interest before a foreclosure stage is reached. Those 2% that do reach foreclosure stage will typically be sold to a wholesale investor, or be kept by the private investor for a personal real estate portfolio. By adhering strictly to our loan-to-value limits, we protect the liquidation value of the investment, to help preserve investor capital even when foreclosure is necessary. Because we have strong equity cushions in these properties, it is typically easier to discount the property and get them sold on the open market.
Q: What is ExpressLoan’s foreclosure track record?
A: We have a great track record when it comes to both foreclosures and collections. One very important aspect of private money lending is to make sure that you have plenty of protective equity in the event of default. We also have underwriting guidelines that look at ability and willingness to re-pay the debt as well as a viable exit strategy. Since 2006 (as you know real estate values have declined substantially since then) we have only filed a Notice of Default (NOD) on 2 loans. Of those 2 only one went through to the foreclosure process and even in that case, the investor on the loan did not lose a penny of principal and was repaid all but a few hundred dollars of the arrearages. In other words, while there was a loss of cash flow for a few months all principal, fees, expenses and just about all the accrued interest up to the sale date was recovered. That is a remarkable record! And, one that no bank we are aware of can claim!!!
Q: What are fractional note and deed investments?
A: Investments into trust deeds can be divided among multiple investors – each providing a fraction of the money. These fractional investments provide the investors a share in the deed proportionate to their portion of the loan amount. Their investments are collectively secured by the trust deed, and the entire loan is serviced and managed on behalf of all the investors involved by ExpressLoan.
Q: How do I decide which loan to invest in?
A: There are many criteria to consider, based on your own investment needs and preferences, including: loan term, location of the property, interest rate, and loan-to-value ratio. Every opportunity we represent has undergone an evaluation by our staff before it is offered as an investment. We only offer investment opportunities that, in our opinion, have a very high probability of performing consistently or paying off successfully. Choosing among them is primarily a matter of deciding which specific deal features are most important to you.
Q: What is the minimum investment for a trust deed?
A: This depends on the investment itself and whether we divide or "fractionalize" as it is called, the loan among two or more investors. On the lending side of the equation, our minimum loan amount is $30,000. However, the average size of our "smaller balanced" loans is $110,000, while the average size of our medium sized loans is $250,000. Although most of our loans are funded by a single investor, on multiple investor loans, the investors typically have at least $100,000 in any one investment. ExpressLoan has a stated loan cap of $500,000. However, we have funded loans as high as $750,000. We can offer an opportunity to someone with less to begin investing in Trust Deeds, but lower initial investments generally take longer to place or must be fractionalized. There is no maximum investment amount as we routinely get loan requests for more than a Million Dollars.
Q: Do I have to handle all of the paperwork myself?
A: No. We handle all of the details for you. We'll present you with an investment opportunity sheet and TD Investment packet with the information you need to make a decision. Should you and/or others commit to invest in a loan, we'll coordinate the appropriate paperwork and create the trust deed that secures that loan.
Q: Is there a fee or cost to invest in a trust deed?
A: No, is the short answer. The borrower covers all fees, expenses, closing costs, title costs, etc. For example, should you make a $100,000 loan and you wire your funds to the settlement agency, the wire fee charged by your bank is deducted by you at the time of funding. In an example if your bank charges $25 to wire you fund the loan with $99,975. The only exception is in the event of a foreclosure, in which any costs not covered by the sale of a property will be the responsibility of the investor – however, this only happens when an investor chooses to either keep a property for their own portfolio, or if the investor chooses to "short" the sale amount of a property so that it's sale doesn't cover all costs related to foreclosure and sale. (Very rare for Private Money and no investor with ExpressLoan has suffered this fate.)
Q: What are the terms of the loan?
A: Loan terms very, but generally are interest only for the length of the loan with a balloon payment at the end. That interest is then paid monthly. Timelines typically range from 1 to 2 years, but demand for longer terms such as 3 - 5 years is growing and new regulations for owner occupied residential properties must be written for 7 years. Rates are based upon multiple factors and can range from 8% to 12% on first trust deeds and higher returns are available on junior (2nd) Trust Deeds earning between 13%-15% APY.
Q: How does ExpressLoan make its money?
A: ExpressLoan earns compensation by originating, underwriting and servicing loans. The borrower pays both the origination fees and the underwriting fees. The servicing fee is netted out of the monthly distribution to investors and represents the spread between the note rate, and the sold rate - the interest rate paid by the borrower is referred to as the “Note” rate, while the interest rate paid to the investor is referred to as the “Sold” rate. For example: we may structure a note rate of ten percent to the borrower, but pay a sold rate of nine percent to the investor. The difference between the note rate and sold rate is commonly referred to as a “Spread”. ExpressLoan’s servicing premium is equal to this spread. ExpressLoan participates in a spread on each loan and is generally equal to one to two percent depending on the individual loan.
Q: Can the loan be paid back earlier than the loan term?
A: Yes. However some loans may have a prepayment penalty, such as an interest guaranty that provides for the collection of interest for a minimum period of time.
Q: What if I need to liquidate before the loan I'm invested in comes due or pays off?
A: Trust deeds are not highly liquid by nature, and no public market for the resale of private mortgages exists. Although there is no secondary market for Trust Deeds, we will assist you with the sale of your Trust Deed. One can also search online for note buyers or look at almost any "trust deeds for sale" or "real estate loan" section of most newspapers to locate a willing buyer. Note sellers most always take some discount on principal when selling. The discount required depends on multiple factors: type and location of property, amount of protective equity, priority of the note (is it a 1st or a 2nd?), cost of dealing with a potential foreclosure, payment history, credit and financial strength of the payor, trends in the local real estate market where the security is located, trends in the national economy, etc. Even under the best circumstances, an investor will need at least a small discount to cover closing costs should the note pay off sooner than anticipated. Ultimately the value and marketability of a note is determined when it is created.
Alternatively, you may consider selling a part of your note as you will often have greater success with a "partial" note sale. The discount will generally be smaller, and there are more buyers. Furthermore, you are able to net some cash up front, and still have payments coming to you down the road.
Finally, we will do our best to accommodate the request in-house. Our first step is to make your investment position available to other investors. If a new investor agrees to take over your position, we make the substitution and redeem your stake. Please note that, while we make best efforts to accommodate these requests, we cannot guarantee that pre-term liquidation can be accomplished.
Q: Can I use my IRA's or retirement plan?
A: Yes. Most people don't know, but making real estate loans is a widely accepted use for IRA's and other Retirement Plans. You can make private mortgage loans using the funds which are already in your IRA's and other retirement plans. These types of transactions using IRA's are potentially Tax free or Tax Deferred - consult your accountant to verify your tax status with your funds. In order to use retirement accounts to invest in trust deeds, the accounts must first be set-up by a third party custodian.
Q: What are the risks associated with trust deed investing?
A: There are four main sources of risk with trust deed investing: property devaluation, interruption of cash flow (i.e., borrower fails to make payments), legal action, and, in the case of second position deeds, subordination in the event of a foreclosure and sale. ExpressLoan aims to manage all of these risks on behalf of investors. For example, requiring an appropriate loan-to-value (LTV) ratio keeps property devaluation risk to a minimum. ExpressLoan carefully manages its relationships with borrowers throughout the loan term – helping to contain the risk of interrupted cash flow and the need for foreclosure. Detailed evaluation of potential borrowers before agreeing to lend money helps avoid backing properties that could be tied up in legal actions.
Q: Why are borrowers willing to pay higher interest rates than banks charge?
A: There are many reasons why a borrower would prefer or require a private loan to a bank loan. Most often, speed, service and flexibility are priorities. For example, when a borrower needs to close a loan very quickly, needs a short-term bridge loan, has imperfect credit, or has a development plan that doesn't fit with (typically somewhat inflexible) standards required by conventional lenders. A private lender can assess the potential risk and vary the terms to make a profitable loan in these situations. Often, a private money loan is the only option.
Q: Why do borrowers choose ExpressLoan for funding?
A: Borrowers choose a private money lender like ExpressLoan when bank financing is inappropriate or unavailable. Many of ExpressLoan's borrowers are repeat clients. They prefer to work with ExpressLoan over other private money lenders because they value the attention and personal service ExpressLoan provides. Working with repeat clients in turn helps ExpressLoan keep its default risk low.
Q: Are trust deed investments FDIC Insured?
A: FDIC insurance only applies to bank deposits. Trust deed investments are not FDIC insured.
Q: What happens when the loan matures?
A: Part of our initial underwriting is to determine the borrower's exit or payoff strategy. Generally, the borrower will pay off the loan by either selling the property or refinancing with another lender, or refinance into a new loan with ExpressLoan. Each of these outcomes provides an opportunity for the initial investors to be repaid.
Q: What type of investments does ExpressLoan offer?
A: We act as a mortgage broker to investors interested in making private real estate loans to California real estate borrowers we've identified and evaluated. A note and a first or second deed of trust secure these loans, which may be funded by a single investor or fractionally by multiple investors.
Q: What roles does ExpressLoan play?
A: For both borrowers and investors, ExpressLoan provides a single management organization to handle evaluation of loan opportunities, loan origination and underwriting, documentation and compliance. ExpressLoan acts as broker for investors lending directly by investing in a specific trust deed.
Q: Why do investors choose ExpressLoan for private money lending?
A: First and foremost, investors tell us they appreciate ExpressLoan's track record of successful real estate lending, and the underwriting and management techniques ExpressLoan uses to achieve their results. ExpressLoan's transparent information policies, along with the depth of information provided about loan opportunities, give investors confidence. Investors also appreciate the personal attention and "boutique" style service the firm provides.
Q: What types of properties are considered for loans by ExpressLoan?
A: ExpressLoan brokers trust deed loans on owner and non-owner-occupied residential real estate, commercial real estate, including retail, mixed-use, offices, apartments and industrial properties and improved lots, farms and ranch. Our loans include purchase money loans, refinance loans, construction completion loans, and rehab loans. We do not broker unsecured business loans or personal loans.
Q: What measures do you take to prevent or minimize risk?
A: ExpressLoan takes several steps and precautions to minimize risk and to protect investor capital. Because we are primarily a collateral-based lender, our first and most important concern is that the property has sufficient protective equity. Our standards for LTV are very strict, and are typically considerably more conservative than a commercial bank's. ExpressLoan further mitigates risk by evaluating a borrower’s willingness and ability to repay. Additionally, we monitor other pertinent criteria including senior lender payments, taxes, and hazard insurance. By monitoring payments to senior lenders, we can protect our investors even when they are in second position. If a foreclosure action has been started by a senior mortgage holder, investors can cure the defaulted payments and have the foreclosure rescinded. Investors would then initiate a foreclosure action to protect their interest.
Q: What happens if, despite preventative measures, the borrower defaults?
A: ExpressLoan has advised investors on loan opportunities through all market cycles. Our in-house expertise in work-out situations allows us to work with the borrowers and successfully work-out the loan to protect invested capital. Foreclosure and sale of the real estate may be part of the process.
Q: What types of investors participate in the funds?
A: Individuals, family trusts, and investment funds invest in these mortgage pools. Besides direct investment, individuals invest through self-directed IRAs, Keoghs, and 401K Plans. Corporations may also invest their pension assets in the funds.
Q: How am I assured that I am investing in a good loan?
A: ExpressLoan conducts a thorough loan analysis prior to creating or investing in a trust deed investment. This process includes (but is not limited to) vetting the collateral (property) and determining its value to ensure a conservative loan-to-value (LTV) ratio, conducting a credit and re-payment analysis of the borrower, performing a thorough title search, and obtaining a full title insurance policy. Throughout the loan term, each trust deed is professionally serviced and tracked monthly to minimize payment default. Hazard insurance is also monitored to make sure that all policies are in effect. Property taxes must be paid current at the time the loan is created or purchased. In the unlikely event of a default, ExpressLoan's experienced team works with borrowers to resolve the situation. If necessary, foreclosure and sale of the property will occur to preserve fund capital.
Q: What is a Trust Deed?
A: Trust Deed is a security instrument which gives the lender an interest in the property the borrower has pledged as security for the performance of a promissory note.
Q: Why Trust Deeds rather than stocks or bonds? What are the advantages?
A: In today's business world there are many opportunities available to investors with varied degrees of risk and return. Investing in Trust Deeds is an extremely secure and relatively simple investment. Unlike other investments, your Trust Deed investment is secured against real estate.
Q: Who can invest in Trust Deeds?
A: Trust Deed investments are possible by Individuals, family trusts and investment funds. Besides direct investment, individuals invest through self-directed IRAs, Keoghs, and 401K Plans. Corporations may also invest their pension assets in the funds.
Additionally, our investors must be residents of California and must have minimum net worth requirements as outlined by the CA Dept. of Real Estate. Call or email us for more information.