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I think I upset a transaction broker, so I wanted to check this community for some opinions.
I was going to lend some money on a property acquisition but was doing so 50-50 with another lender. When I got the closing paperwork for review, I noticed a couple of things:
– No points and no prepayment penalties. This was to be a 3-year interest-only loan. I asked if we could do better because what’s to stop the borrower from immediately selling the property and paying out the loan? Wouldn’t this be a pretty cheap transactional loan if that were the case?
– There were two promissory notes and two Deeds of Trust; each in our respective entities. My concern was that one of us would be in 1st position and the other in 2nd. I was assured we’d both be in 1st by the broker, but I felt uncomfortable. Is there something I overlooked or some gap in my understanding that would have alleviated that concern? I suggested that we lend out of a personal property trust and hold 50% beneficiary interests respectively.
In the end, I offered to take myself out of the deal since I was the one who had questions and no time to have an attorney address my concerns.
Any thoughts from anyone on any of this?
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First, some disclaimers from me. I am not an attorney; it’s bad enough having close relatives who are, and think they know it all even when they’re dead wrong. Secondly, I am going to share some first impressions based only on your description of the events.You didn’t say who drafted those closing documents. My impression is that either the drafter was incredible incompetent, OR had a behind-your-back relationship with the intended borrower. You also didn’t say if the transaction broker that you may have offended was just a fee-taking middleman, or if s/he was the other 50% lender, or both.
In any case, the no points / no penalties provisions are a poisonous deal-killer as is. The broker’s assurance that both lenders would be in 1st position makes no sense. Your counter proposal to use a personal trust with only one deed of trust, and with both lenders’ entities having a 50% beneficial interest makes far better sense, but I’m guessing that the broker and/or other lender want no part of such an arrangement. I would love to be proven wrong — for your benefit.
You appear to be vulnerable to being scammed in multiple ways. I would question the motives, competence, and integrity of both the broker (and the other would-be lender, if a different person), especially if s/he or they want no part of a rewrite.
These are just my personal impressions, coming from a congenital and unreformed analyst.
–Dee
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I should have added some more questions. You didn’t mention what kind of property this target is — whether single family residential, multi-family, or commercial, and approximately where the property is. Some locations will get clobbered earlier and deeper than others as the nation’s financial bubble loses more and more air.You also didn’t mention how much “skin in the game” the intended borrower would be bringing to the table, or what that borrower’s expertise is. All these things matter to lenders who must look at, and price the risks, of any such project. Does the deal propose to cover your (and the other lender’s) risk in the event that foreclosure is the only way to recover the deal for you?
The three year loan proposal implies a fairly complex undertaking. Do you, and/or the other lender, have the expertise to price the kind of risks I’m discussing?
Finally, do you think the proposed borrower has any clue about the hazards of taking on such a project going into a nationwide recession that is likely to make 2008 look like a walk in the park. Even the graduate business schools do a lousy job of teaching about Federal Reserve-generated booms and busts about every 10 years or so, and lots of entrepreneurs tend to regard that subject matter as dark voodoo, and frequently get wiped out as a result, along with their lenders.
–Dee
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Hello Dee,
It was a SFR in the Dallas area. ARV 180s, but the combined loan would have been 130. The borrower was going to buy, lipstick flip, and owner finance. Each lender then would have 65k in the deal. The broker originally was going to be in the deal, but let me know they were pulling out and replacing themselves with someone else.
I asked why they pulled out and was told it was because it was a prohibited transaction to them because they were being compensated. It was then that I assumed they were becoming a broker in the deal versus a principle, but that was their choice! They could have stayed in the deal.
At that point, my spidey senses went off, but I was still going to do my due diligence. They reassured me that both lenders would be in 1st position, but I felt like that was not true. Anyway, I hope it works out for the new pair of lenders.
I want to trust people and who knows if there was any ill intentions. I don’t know what I don’t know. In the end, you have to trust your own systematic due diligence and be sure that it is as strong and comprehensive as it needs to be.
Now about this recession you mentioned. I’ve been away from this site for a while, I need to go read some of your posts or read some discussions elsewhere. Is the thought that we need to keep our powder dry?
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The broker’s last minute discovery of being both a lender and a broker for the same transaction being prohibited does not speak well for that broker’s experience, at the least. S/he could have made a lot more money as a lender than as a fee collector, so bailing out at the last minute speaks to knowledge s/he has that’s not been disclosed to you. There is a serious issue of trust here.Seldom in such a deal can you know everything about it. There is an art to making decisions based on imperfect or incomplete information, and I think you made the same choice that I would have made.
Regarding the national financial bubble that’s been leaking air, there is a longstanding conflict between the media that worships the mega-banks, the established realty community, the Federal Reserve, etc versus the honest media that the above worshippers despise. There have been several articles posted here on CFD about the housing bubble and the national financial bubble leaking air this year. They are all pretty much aware of the Federal Reserve’s stinky habit of pulling off a boom and bust roughly about every 10 years or so. When the Fed cuts interest rates to the bone and makes dirt cheap money available to the mega-banks, the “first receivers” of such cheap money get the most benefit.
Entrepreneurs who rely on those banks sometimes borrow up to their eyeballs for various projects that appear to be profitable, based on the ultra-low interest rates at the time. And they can do business that way until the Fed pulls the rug out from under them, and jacks up the interest rates. At that point, a lot of commercial banks will try anything possible (some of it illegal) for force time-tested reliable borrowers into bankruptcy, so they can foreclose, build up their cash reserves, auction those properties off for a song, make up the difference from some backdoor federal insurance, and let the Wall Street-funded vulture funds that spring up snap up such bargains for high profits. It’s a dirty cycle. I’m describing what happens on the commercial side, but there are parallels on the real estate side as well, whether single family or multi-family.
Which is why CFD has been advising that when going into a recession (especially a likely really bad one), don’t be the cash investor or lender who stands to get wiped out when the crash kills the project values. Instead, do low risk deals with options, or do master-leasing, eg., where your own cash and credit are not at risk.
–Dee
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I need to address the borrower’s intention to owner finance his “lipstick” flip. I don’t know what interest rate structure he intends to charge, nor do I know what your two-lender paperwork contemplated as an interest rate structure. But I think you need to look at this chart that has a line for cost of living increases for Dallas, both on a yearly basis and on a 5 year average:Believing what the thoroughly dishonest BLS (federal Bureau of Labor Statistics) says about inflation is deadly. Instead, look at the most recent 5-year average for Dallas — at 9.28%. Does that help to explain how unknowledgeable private lenders get creamed when they don’t factor in ACTUAL increases in the cost of living (which is the comparable loss in purchasing power of the US dollar)?
I’m guessing that between the no-points and no prepayment penalty closing document and whatever interest rate you had in mind to charge, you would have been very at risk for losing purchasing power over time in that deal. Does that help explain why hard money lenders seem to be charging outrageous interest rates, when in fact they’re compensating for a frightening actual annual loss of the dollar’s purchasing power?
FYI.
Wishing you all the best,
–Dee
If I’m following this thread correctly, you are asking who’s on first?
A title report, or at least a preliminary title report will show all liens and encumbrances in the order they were placed on the property.
Your preferred title company should provide these to you gratis if you are a good customer.Hope this helps,
Mike
There is no cure for curiosity!
That opens up a new discussion. Doing our own title research.
This will take us forward into visiting the courthouse records, first physically, then online.
Many county recorders personnel will take time to help you at their office. My own experience has been quite positive.
Ask for help. Pay attention. Please and thank you go a long way.When I lived in Las Vegas, I was fortunate to have met some very nice people in the (can’t say which) department.
I had a good friend who worked in one of the popular shows on the Strip, and he arranged for them to see the show backstage.
They were thrilled.And we always had our phone calls answered promptly
That wasn’t planned. We just went in together, asked questions and friendships formed.
Will you miss things? Yes. But fewer than you think.
Will you learn a ton? OH YES!
Is it a perfect science? No. Even title companies miss things.
After all, humans are involved and we make mistakes.Sometimes its in our favor, sometimes not.
I prefer to spend some time at the recorders’ office in the beginning. It need not be hours and hours.
Then you can access the info online and have a clearer understanding of what’s what and who’s who.Hope this mini-rant has been useful,
Mike
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