Tag Archive for: deed to trust investing

Private Lending Warning #5

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Private Lending Warning #5…FAKE OWNERS

How would you like to lend someone money on a property that you think you’re in a good, secure position with? But then you find out they never owned the property to begin with?

Trust me, it happens.

Everything looks great until payments don’t arrive, and you hire an attorney to foreclose on the property. That’s when you find out the borrower never owned the property and had no right to put a lien on it. Worse, if a lien was actually placed on the property that someone else owns, you will have the extra cost of releasing the lien.

Believe it or not, there are brazen thieves in the world who will fake ownership in properties. They might rent and/or borrow money on them.

So, where does that leave you and your money?

Unfortunately, by the time you discover all of this, most or all of your money will be gone. You’ll probably never find the person who stole it. If you do, they will likely have spent it all.

How do you protect you and your money from a fake owner?

Most thieves are always looking to talk you into a shortcut.

They will tell you, “It’s just a waste of money to involve outside resources for a simple process like a loan.” After all, you both can go right down to the county and record the mortgage or deed (aka, the lien). You can literally watch them hand the lien over to the county and get a receipt to prove it’s recorded.

Guess what?

The county does not check who owns the property when an item is recorded. They simply record what’s handed to them.

So, great. They recorded the lien, but the lien is not valid, and your money is not secured. More likely, it’s gone.

This is another reason you should involve outside resources on such a large money transaction.

The key to stopping thieves is to require every loan be closed, insured, and recorded by a title company. A title company will check and verify the borrower actually owns the property and you’re in the lien position you’re expecting.

If a thief is good and brazen enough to fool the title company, the title company will pay you back your money and write off the loan. But this only happens if you actually pay for a title insurance (aka, a loan title policy).

Title insurance gives you peace of mind that your loan is secured and valid.

Most thieves will never agree to this because they know they’ll get caught. To avoid getting caught, they will try talking you out of purchasing title insurance. They usually do this by pointing out the costs and time involved.

Regarding these so-called costs: If a borrower goes to a traditional lender or bank, they will pay thousands of dollars more than a private lender. So, the cost of title is on the borrower, not you. If they don’t want to pay for title insurance, then fine. They can find another lender and you can find a better borrower; someone who’s grateful and happy to pay a little extra to ensure your funds are secure.

Never listen to a borrower if they claim these costs are nonessential. A quality borrower will be focused on protecting your money by using third party resources, like a title company to close and record.

 

Check out:

Warning #1

Warning #2

Warning #3

Warning #4

 

Private Lending Warning #5

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Private lending Warning #4

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Private lending Warning #4…OVERFUNDING THE PROPERTY WITH MULTIPLE LOANS

 

Have you ever had a borrower need money now?

They have the deal of a lifetime and don’t have time to mess with using title for closing. They’ll even record the deed themselves to speed things along. After all, they have successfully closed hundreds of deals, so you can trust them to record your deed.

CODE RED!

DON’T TRUST ANYONE TO CLOSE YOUR DEAL EXCEPT TITLE.

As mentioned above, thieves will try and claim title is just a waste of money and they would rather see you get a better return than throw it away using a title company.

For example, take a look at this $30-million-dollar scam that took place in western Colorado:

A scam artist raised over $30 million from local investors by promising them first deeds of trust on the properties he was buying. To save time and money (or so he claimed) he asked most of the private lenders to come into his office and complete the paperwork. He then took their money and gave them a loan and deed. Each lender thought they were in first lien position.

Unfortunately, they weren’t.

The borrower lied to all of them.

When the Feds finally showed up, all of these lenders were left with about $5 million to split. That might sound like a lot, but it wasn’t. Most of their money and investments had vanished. And it all happened because these lenders chose to trust the borrower and not use a title company to close their loan.

The few who did use title forgot to tell title a very important fact: “I want to be in first lien position.”

So, they too lost most of their money.

Yep, you read that right. If you don’t tell a title company you expect to be in first position, you might end up in a much lower lien position (like 3rd or 4th). That means if something goes wrong with the loan, you’ll have other lenders ahead of you that get paid first.

SO ONLY FUND THROUGH TITLE WITH SPECIFIC INSTRUCTIONS.

Never worry about saving the borrower time and money. Save your time and money from them.

(Check the FBI files to read more about the $30-million scam.)

 

Check out:

Warning #1

Warning #2

Warning #3

 

Private lending Warning #4

 

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Private Lending Warning #3…PUSHING THE VALUE

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Private Lending Warning #3…PUSHING THE VALUE

 

The value of the real estate is your number one protection for your loan. This is the asset behind all the money you’re lending.

It’s the real asset that’ll keep you protected.

But what if that asset isn’t worth as much as the borrower claims?

In all the years I’ve been lending, it still surprises me how far off some people are in their valuation of properties. So many will compare their run-down property to a completely remodeled house and think they would have the same sale price/value. Or they show you a comparable of homes close to their own that are from a higher end subdivision.

For example, my brother lives in a house close to our current office. His home is what I would call a mid-priced home for this area. Within a mile of his home, there are three distinctive subdivisions all separated by a single street. You can tell by driving through the properties they are at different price levels based on the materials used for construction, lot sizes, and amenities.

In this area, the same size house could range from $400k (entry level) to $500k (mid-area), to $750k (nicest subdivision). This is a huge difference in value and what an owner can sell their property for in the future.

Let’s look at an example for a loan of $400k on these properties and evaluate the level of security for the lender (you).

For a home in an entry level subdivision ($400k), your loan will be at the full value of the property. In our opinion, this would be a high-risk investment. What would happen if you had to take the property back and sell it?  You would probably lose money with all the costs to foreclose and sell the property. You’d likely walk away from this deal in the red.

For a home in the mid-level subdivision ($500k), you have decent protection with over 30% equity above the loan you have on the property.  So, the risk might be worth it.

For the final home in the high-level subdivision ($750k), your security is almost at 50% of the value. So, you’re fairly safe.

Which security would you prefer? Most likely, you’d opt for the higher amount of equity to protect your money.

The problem is, we don’t always know the value of a home. If someone doesn’t know an area very well, they might go online and be blind to the differences between entry, mid, and high-level housing.

It’s also easy for thieves to exaggerate the value and put you in a lien position that doesn’t cover all of your loan.

Exaggerating value is a huge issue.

It shows that the borrower is a thief or that they’re so new to investing, they don’t understand real estate valuation.

How do you protect yourself from over valuation?

  1. If you can, always drive by the house or through the neighborhood to see if there are distinct areas that are different subdivisions.
  2. Hire a professional to value the property for you.
    1. Find an appraiser you can hire or;
    2. Locate a realtor who works in the area and pay them to value the property for you.

Let the experts come up with the value and trust them. They are unbiased and understand the different types of properties and neighborhoods. It’ll be worth your time and peace of mind to spend a few dollars to get professional advice.

Above all else, do not trust the value from the borrower. It doesn’t necessarily mean they are trying to lie to you. They simply might not know the value of the property.

Rely on your own due diligence and that of the professionals you hire to protect your loan.

Value does matter.

 

Check out Warning #1 or Warning #2

Private Lending Warning #3

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Private lending Warning #2

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Private lending Warning #2…NOT USING A THIRD PARTY FOR CLOSING AND DOCUMENTS.

Another popular way for private lenders to get scammed is allowing a borrower to provide all the documents (loan, mortgage, deed etc…).

 This might appear to make the process easier for everyone (especially when you don’t have any documents in your back pocket). But it won’t be easier. It’ll only lead to problems. Possibly devastating problems.

Let’s check out an example:

I once had a client, Jennifer, who lent money to a person on one of their homes. This person was a local real estate guru, so Jennifer thought she could trust him. She went ahead and let him write up all of the documents.

He completed them and she funded the deal.

Fast forward six months…

The loan ran into problems and Jennifer wanted to collect.

Guess what she found out? Not only did her borrower not file a lien, but he did little to protect her in the promissory note he created.

When she came to me for help, we discovered the note did not allow for her to collect any attorney fees or default fees. So, the borrower could keep using her money, unless she wanted to pay thousands of dollars out of pocket to collect on the loan.

The best she could do was get her principal back, while he continued to hijack her money at little to no cost.

Why was he able to hijack her money?

Because he wrote up all of the loan documents and MADE IT LEGAL TO STEAL!

 

Did you miss Warning #1? Click here to read it in a past blog post.

 

 

Private lending Warning #2

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