Fairfield Financial Services, Inc. - Private Money Loans, Lending & Borrowing

Examining an FAQ about Trust Deed investing

S. Clay Sparkman

TNG (The Norris Group) published the following FAQ on their site. I thought it might be fun to go through this and see where I agree and perhaps disagree, and offer my annotations (in red).

Frequently Asked Questions About Trust Deed Investing

1. What is a trust deed investor?

A trust deed investor is a person seeking a competitive rate of return by loaning private funds on real estate. In short, you’re the bank. The loans are secured by real estate. A trust deed investor makes a higher interest yield than would typically be obtained by a regular bank and is secured by the borrower’s equity in the real estate transaction.

SCS: Agreed.

2. How much money do I need to start?

In 2013, the California Bureau of Real Estate (formerly the Department of Real Estate or the DRE) released new guidelines via SB978 that makes qualifying for trust deed investing much clearer. No one trust deed can be more than 10% of your net worth. This does not mean you can’t have more than 10% of your net worth invested in trust deeds.

As an example, if The Norris Group has a $100,000 trust deed available, a potential trust deed investor should have a net worth of at least $1,000,000. This same investor can come back and do another trust deed investment that meets the same 10% criteria.

The California Bureau of Real Estate (CBE) requires brokers like The Norris Group to have investors fill out an Investor Questionnaire (also known as Real Estate form 870 of re870).  We are audited by a third party auditor that reports back to the CBE on a quarterly basis and the CBE expects this form to be on file for each transaction. The form was created to ensure each investment is “suitable” for the investor.

The questionnaire is simple and asks information like name, contact info, education, experience, income, net worth, liquid capital, and goals for the investment. You can download this form and email it back to us or fax to (951)780-9827 to be added to our First Look Program to be first to see upcoming available trust deeds.

SCS: This part is specific to CA. I’m not going to comment on the CA portion, as they probably know more than I do. Beyond these CA specific issues, you need maybe $100k to get started making full TD loans (that is about the minimum size), and if you wish to make fractional loans (more than one lender has a share of the beneficial interest as security), then you need at least $50k to lend through us, but also note that you must be an accredited investor to do this type of investing with an institution that does not have a securities license or does not otherwise have some special exemption. (Note: In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and a reasonable expectation of the same income level in the current year.)

3. Can I use my IRA funds or 401k for trust deeds?

Yes. The Norris Group actively places funds from IRAs, Self-firected IRAs, Roth IRAs and several other retirement accounts. Trust deed investing is a fantastic way to diversify your retirement portfolio and to leverage these types of accounts.

However, please contact your plan representative as all IRAs have different rules and regulations.

SCS: Agreed. True for FFS as well.

4. What’s the typical property you loan on?

The Norris Group only lends on non-owner occupied homes in California. We mainly focus on single family homes and units (1-4 only). We offer everything from fix and flip to long-term holds to new constuction. Our programs change occassionally to adjust to the California market.

SCS: TNG specializes a bit more than FFS. We make commercial, business, and investment loans secured by property in OR, WA, ID, CO, MT, and NV (some other states as well, but this is where our focus is right now.

5. What is the yield?

Annualized yield will depend on the length of individual investment and the availability of a property for rollover. Some investments last for three months and some last for several years depending on the program you choose.

In our 6% trust deed program, investors will most likely see a 6% return annually because of the 3-year term on the loan and the one-year prepay typically ensures the investment stays in place for a longer period of time.  Many investors seeking consistent cash flow with less in-and-out tend to invest with this program.

In our shorter-term Fix and Fix and new construction programs, there is no prepayment penalty. Loan lengths vary and annualized rate of return will depend on how quickly the loan pays off and whether there is another investment available for the same amount immediately after the close of the first.

SCS: This really depends on who you are working with. FFS secures yields of from 10% to 14%. Our typical yield is 11%.

6. Do you pool my money with other investors?

The Norris Group does not typically pool funds. We will consider immediate family members, entities, and family trusts. We feel this method has served us well over the years and gives the trust deed investor more control over their investment. This is also often referred to as fractionized loans.

SCS: See above for my answer to this question. We don’t pool, but wee fractionalize.

7. Is it safe?

Every investment has risk. However, unlike many other investment vehicles, trust deed investing with The Norris Group ensures you own a first trust deed on a specific California property. This means you have ultimate control and a physical asset that can be sold or rented out.

SCS: This is a fair statement.

8. Once I’ve committed to be a private lender, what should I expect?

To find out more how the trust deed process works at The Norris Group, click HERE.

SCS: n/a

9. How large are the loans?

The Norris Group has brokered loans from $30,000 to over $1,000,000.  However, our main focus in this market is first time buyer inventory as it makes up the majority of the market. That being said, most of our loans range from the $40,000-$350,000 range.

SCS: Our numbers are similar at FFS.

10. What is your loan to value that you loan on?

The Norris Group loans up to 60-70% of the After Repaired Value (ARV) of the home. If the property is in our long-term rental program, it is already repairs so it’s the loan-to value we look at but it still falls within the range of 60-70% LTV.

When deciding on how much to lend, The Norris Group considers property location, repairs needed, investor experience, and property type.

SCS: FFS is in the same realm with regard to LTV.

11. What are points?

Points are the fees paid by the borrower to The Norris Group for acting as broker in a hard money loan transaction.

SCS: Agreed.

12. Do you offer 2nd and 3rd trust deeds?

No. The Norris Group only offers first trust deeds on all of our investments as we feel this offers a more secure investment with much lower risk.

SCS: That is good policy. We rarely take on subordinate position loans, but if a loan is extremely solid and well secured, we may vet it fully and offer it to our investors.

13. Why is my return 6% when it says 6.9% on the website? What is servicing?

The Norris Group charges a servicing fee annually on all of our programs. Servicing includes collecting checks from the borrowers and remitting them to all trust deed investors monthly. The Norris Group monitors property tax payments and insurance requirements on all investments and communicates with the borrower and trust deed investor as needed. The Norris Group also handles end-of-year tax requirements and paperwork.

SCS: FFS does not charge a servicing fee, and so you receive the full stated amount of interest.

14. Why don’t I skip you completely and work with an investor directly?

Regulations require a professional broker to obtain higher returns and for trust deed investors to be in complaince with usury laws (read more on usury laws at the California Office of the Attorney General)

In addition, using a professional and experienced broker allows you to make higher annual returns because you’re adopting an established team that finds, structures, and services the investment. It expands the marketplace for you, lowers your risk, saves you time, and ultimately increases your return tremendously.

SCS: Agreed. It is a big job to do this entirely on your own.

15. What does loan servicing include?

Loan servicing includes the back-office tasks of collecting payments from borrowers, disbursing payments to the investor, mailing required notices and statements, year-end tax documents for the IRS and franchise tax board, maintaining adequate borrower insurance coverage, and coordinating foreclosure proceedings if necessary (rare).

SCS: Agreed. Similar for FFS.

16. Who in my network might be able to advise me on these types of investments outside of the Norris Group?

Having an excellent team is always important and we suggest you check with your tax advisor, financial or retirement planner, and/or your attorney. The trifecta of estate planning!

When selecting professionals, please be advised that not all will be comfortable or allowed to help make decisions on real estate and alternative investments. It is a specialty and we always encourage our network to work with professionals that will consider a client’s entire portfolio including real estate. In our experience, real estate has been a major component of create wealth. Work with those that like the vehicle and will look at your situation holistically to do what’s best for you.

Feel free to call for referrals. We have several financial planners, lawyers, and CPAs that specialize in working with real estate.

SCS: Fair enough.

17. Where can I find more information about trust deed investments in California?

The California Department of Real Estate (DRE) has been renamed the California Bureau of Real Estate.

SCS: n/a

They have an entire document you can read on the subject of Trust Deeds.

18. Who can invest in trust deeds?

Private individuals, corporations, pension plans, 401Ks, custodianships, LLCs, retirement funds, IRAs, Roth IRAs, Self-Directed IRAs, Charitable Remainder Trusts (CRTs), Foundations, endowments, family trusts, family members, and SEP accounts. Some retirement amounts have limits so please check with your custodian or agent. The Bureau of Real Estate simply requires that no single trust deed can be more than 10% of your (or an entity’s) net worth. We’ll have to have the BRE’s Investor Questionnaire on file as they look for this as part of every transaction. You can see this HERE.

SCS: Agreed.

19. Do you require fire insurance on the property?

Yes. Not only do we require fire insurance but we require the investor inform the insurance company that the property is vacant. We require coverage in the amount of the loan or replacement guarantee.

SCS: Agreed.

20. Will I be given a complete profile on the property?

By the time we present the property for funding, we’ve already had an independent appraisal done on the property.  We’ll send to you a copy of that appraisal along with the address for you to view the property.

SCS: Agreed. However, with FFS, if we can get a good set of well annotated comps, that may serve as the valuation instrument. Probably 90% of the time, we work with an appraisal.

Please weigh in if you have any additional thoughts regarding the items discussed here. We would appreciate your input.

— Clay (clay@privatemoneysource.com)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

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