Promissory Notes Secured By Deed of Trust

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Promissory Notes Secured by Deeds of Trust

Real Estate Investing: Hard Money Loans

Promissory notes secured by deeds of trust on local real estate provide the security for hard money loans.  The note is the agreement to pay.  The deed of trust is the collateral.  If the note is not paid the investor can, without going to court, foreclose on the collateral which is the real property the deed of trust is recorded against.  Each investor is named on the deed of trust.  In essence, you are the bank!

This type of real estate investing yields a high rate of return with Bankers Group, between 8 percent and 10 percent.  Loans are usually written for one year but may be extended if the borrower and lender agree.  If a lender needs repayment, Bankers Group can sell his interest by assignment for full value.

• Bankers Group will service your loan for a ½ point annual fee. Many mortgage companies charge a much higher fee of up to 3 percent.
• Investors get monthly payments by check or ACH transfer, whichever they prefer.
• We have long-standing relationships with our clients, both borrowers and investors. Most of our borrowers are repeat clients.
• We’ve known many of our investors for years. Bankers Group has been originating and servicing hard money loans since 1980.

Contact Us Today

For investor information, contact 

Dorothy Reik
President
Bankers Group
Cell: 310-291-1300 (call or text)
Home: 310-455-4050 
Office: 818-226-6100
dorothy@bankersgroup.us
CalBRE Lic #01233829 
NMLS Bankers Group ID #294230 
(B&P 10140.6(b); Regulation 2773). 

Bankers Group is located at 5311 Topanga Canyon Blvd Suite 201, Woodland Hills, CA 91364.

Bankers Group works with homebuyers on conventional home loans and hard money loans in Topanga, Woodland Hills, Calabasas, Malibu, Pacific Palisades, Santa Monica, Venice, Brentwood, Westwood, Beverly Hills, Bel Air, West Hollywood, North Hollywood, Hollywood, Valley Village, Laurel Canyon, Coldwater Canyon, Encino, Van Nuys, Sherman Oaks, Reseda, West Hills, Canoga Park, Chatsworth, Agoura Hills, Thousand Oaks, Sylmar, Oxnard and the greater Los Angeles area.

Real Estate Investing: How To Start Deed of Trust Investing

The Promissory Note & Trust Deed Process: Understanding Your Hard Money Investment 

Prior to becoming a lender of loans or a purchaser of promissory notes, you should understand the following principles:

What is a promissory note?

A promissory note is a written promise to pay or repay a certain amount of money at a certain time, or in a certain number of installments, or on demand to a named person and it usually provides for payment of interest.

The person receiving the loan proceeds (borrower) becomes obligated to repay the debt by signing a promissory note which specifies:

(1) the amount of the loan (principal); (2) the interest rate (interest); (3) the amount and frequency of payments (debt service); (4) when the borrower must repay the principal (due date); and (5) the penalties imposed if the borrower fails to timely pay or tender a payment (late charge) or decides to pay a portion or all of the principal prior to the due date (prepayment penalty). The promissory note identifies the borrower and the person who will receive the payments (lender or note holder).

How do you obtain a promissory note?

The importance of the Mortgage Company or Mortgage Broker: You obtain a promissory note (become a lender or note holder) by either making a loan or purchasing an existing promissory note. Unless the loan is made or arranged by a real estate broker, a private party when making a loan will be subject to an interest rate ceiling imposed by the California State Constitution. Charging a rate in excess of this ceiling is referred to as usury. Even when purchasing an existing promissory note (unless the purchase is arranged by a real estate broker), a private party, depending upon the fact situation, may still be subject to usury.

A mortgage broker who for compensation, or in expectation of compensation (regardless of form) assists the public in making or arranging loans is commonly referred to as a mortgage loan broker (MLB).

What secures your hard money investment?

Your investment is secured by a deed of trust recorded against the title of the borrower’s real property (the Property). Unlike deposits in a bank or savings and loan, which are generally insured by a federal agency (such as FDIC) and may usually be withdrawn with limited notice, the promissory note: (1) involves risk to principal (a typical feature of all investments); (2) establishes a specific and predetermined period of time for the repayment of your investment; and (3) does not benefit from insurance issued by a federal agency.

In a deed of trust, the borrower (trustor) transfers the Property, in trust, to an independent third party (trustee) who holds conditional title on behalf of the lender or note holder (beneficiary) for the purpose of exercising the following powers: (1) to reconvey the deed of trust once the borrower satisfies all obligations under the promissory note; or (2) to sell the Property if the borrower defaults (known as a foreclosure).

Foreclosure involves the process of selling the Property to a third-party bidder or, in the absence of a sufficient third-party bid, acquiring title to the Property. The foreclosure sale, in most cases, satisfies the debt.

Seven Essential Elements of Trust Deed Investments:

1.    Knowledge, experience, and integrity of the Mortgage Loan Broker through whom the transaction may be made or arranged.

2.    Market value and equity in the Property and the security for your loan.

3.    Borrower’s financial standing and credit worthiness.

4.    Escrow process involving the funding of the loan or the purchase of the promissory note.

5.    Documents and instruments describing, evidencing, and securing the loan or purchase of the promissory note.

6.    Loan servicing provisions, authority and compensation.

7.    Recovering your investment when the borrower fails to pay.

1. Knowledge, experience, and integrity of the Mortgage Loan Broker through whom the transaction may be made or arranged:

Before placing your trust and money with a Mortgage Loan Broker, you would be wise to call: (1) the Department of Real Estate (DRE) to determine if the broker and his or her loan representatives are properly licensed, how long each has been licensed, and whether any of the licenses have been disciplined; and (2) the local Better Business Bureau to ask if any complaints have been lodged.

Ask the broker if he or she is the borrower or if he or she has any relationship to the borrower (e.g., if the broker is a relative, a shareholder, an officer, a director, or a partner of the borrower). When the broker is the borrower or related to the borrower, we refer to the transaction as “self-dealing.”

1. Market value and equity of the property and the security for your loan

The market value of the Property is critical to your decision to lend your funds or purchase a promissory note because there is a possibility the only way to recover your investment is through the sale of the Property. Therefore, the market value of the Property should be correctly estimated and the total loan-to- value (LTV) ratio properly analyzed as illustrated below. This information should be made available to you before you commit your money to the transaction.

Market Value — The sale price, the cost to build, or the value in use to a specific owner does not necessarily represent the market value of the Property. A market value opinion requires consideration of comparable sales and other market data by a competent professional.

The market value conclusion may be presented in the form of an appraisal report. While the borrower customarily pays for the cost of the appraisal report, either you or the mortgage loan broker usually retain the appraiser’s services to prepare the report, which should be reviewed by you in advance of funding the loan or purchasing the promissory note. You should make every effort to inspect the Property which will be the security for your investment.

Loan-to-Value (LTV) Ratio — The total loans against the Property, including your loan, divided by the market value of the Property determines the loan- to-value ratio. For example, if a borrower has a first deed of trust in the amount of $25,000.00 and is requesting a second deed of trust in the amount of $40,000.00 and no other liens will be placed against the Property, which is valued at $100,000.00, the loan-to-value ratio is 65% ($25,000.00 + $40,000.00 divided by $100,000.00 = 65%).

The lower the loan-to-value ratio and the greater the borrower’s equity, the more incentive for the borrower to protect the equity in the Property (i.e., sell or refinance the Property if unable to make payments under your promissory note) or for a third-party bidder to purchase the Property at a foreclosure sale. If the Property is over encumbered (the total loans or other liens exceed a reasonable loan-to-value ratio or exceed the market value), the Property will provide little or no security for your investment. A sufficient equity should be maintained in the Property to allow for the fees, costs, and expenses that you will incur in foreclosing if that becomes necessary.

Preliminary Report (PRELIM) — The mortgage loan broker is required to provide you with the option to apply to purchase title insurance or an endorsement to an existing policy. The PRELIM, also known as the Preliminary Title Report, is prepared by a title company and is an offer to insure and does not provide conclusive information about the status of title.

Title insurance companies offer different types of coverage. You should ask your mortgage loan broker or the title company from whom the report was obtained for an explanation of the different types of coverage available (e.g., California Land Title Association (CLTA) and the American Land Title Association (ALTA)) and to what extent you are insured.

You should not consider a PRELIM as providing you with reasonably current information unless it is dated within 90 days of your examination of the report. Therefore, you should ask the mortgage loan broker to provide an amended and current PRELIM dated as closely as possible to your commitment to fund a loan or purchase a promissory note.

The current PRELIM should provide the following information regarding the Property:

1. The name(s) of the owner(s);
2. Legal description, street address (if available), and the assessor’s parcel number (APN);
3. Assessor’s plat map, which illustrates the configuration, dimensions, and general location of the Property;
4. Assessed valuation;
5. Existence and priority of liens and encumbrances;
6. The name of the owner(s) of existing lien(s); i.e., the owner of record of any deed of trust (lien) which you may be purchasing;
7. Requests for notices concerning status of the liens, notices of default (NOD), and notices of trustee’s sale (NOS);
8. Notice of a lawsuit or bankruptcy affecting the Property; and
9. Potential off-record interest of a spouse or other party.

 3. Borrower’s financial standing and credit worthiness.

The borrower’s ability to repay the loan involves the “capacity” and “desire” to make the loan payments.

The borrower’s capacity is measured by: income; job position and stability; and overall financial standing, including assets, liabilities, and net worth, and any profit or losses incurred as the result of any business or investment activity. This information is reflected in the borrower’s “Loan Application,” which may be accompanied by a “Financial Statement” if the borrower is either self-employed or involved with significant business or investment activity. The mortgage loan broker must give you a copy of the written loan application and the credit report.

To verify the borrower’s representations about capacity to pay, you may examine:

(1) Verification of employment;

(2) Income tax records;

(3) Verification of cash deposits or other assets and

4) Statements from existing lenders reporting amounts owed (beneficiary or payoff demand statements).

The desire to repay is based on the borrower’s past performance in handling credit. To verify the borrower’s representations about desire to pay, you may ask to review:

(1) Credit report;

(2) Reports providing payment history on existing loans, including the number of late payments (loan status reports); and

(3) Credit references.

When considering the borrower’s capacity and desire to repay, you should ask whether the borrower has, immediately preceding the request for the loan, borrowed a substantial amount of money. A significant amount of concurrent borrowing may indicate the borrower is experiencing difficulty meeting his or her financial commitments.

Extensive borrowing may make it more difficult for the borrower to meet financial commitments.

4. Escrow process involving the funding of the loan or the purchase of the promissory note

Your funding of a loan or purchase of a promissory note should be transacted through an “escrow.” An escrow is opened when money, documents, instruments, and written instructions regarding the transaction (escrow instructions) are conditionally delivered by the principals to a third party (escrow agent).

The escrow instructions set forth the conditions which must be satisfied or waived before the escrow agent may disburse your funds to either the borrower or the note holder. These conditions include, but are not limited to:

(1) removal of certain liens;

(2) payment of delinquent taxes;

(3) execution and delivery of the promissory note and deed of trust or execution and delivery of the assignment or endorsement of the promissory note and assignment of deed of trust (if you are purchasing an existing promissory note);

(4) selection of title insurance coverage; and

(5) recording of the deed of trust or assignment of deed of trust concurrently with the delivery of funds pursuant to the escrow instructions.

5. Documents and instruments describing, evidencing, and securing the loan or purchase of the promissory note

Your trust deed investment will either be secured by a “whole” (only one lender or note holder) or a “fractionalized” (more than one lender or note holder) deed of trust. “Fractionalized” promissory notes and deeds of trust, when negotiated by an mortgage loan broker, are subject to regulation by the DRE, which enforces the Real Estate Law, and the DBO, which enforces the Securities Law.

The Real Estate Law includes what is known as the “multi-lender law.” This law imposes certain restrictions including:

(a) no more than 10 lenders or note holders (you and your spouse would count as one lender or note holder on a single investment);

(b) the mortgage loan broker must service your loan and have a written agreement with you to that effect, or the mortgage loan broker and you must arrange for loan servicing by a person who is either properly licensed as a real estate broker or exempt from licensing by law;

(c) defined loan- to- value ratios, based on the type of property being used as collateral, are generally not to be exceeded;

(d) you may not invest more than 10% of your net worth or your annual income;

(e) your loan must be directly secured by the Property and may not be indirectly secured through another promissory note and deed of trust (collateralization);

(f) the mortgage loan broker may not “self-deal” except in limited circumstances;

(g) the deed of trust may not include a provision for subordination to a subsequent deed of trust;

(h) with certain exceptions, the promissory note may not be one of a series of notes secured by liens on separate parcels of real property in one subdivision or contiguous subdivisions; and

(i) your interest and the interests of other lenders or note holders must be recorded and identical in their underlying terms so that each note holder receives his or her proportionate share of the principal and interest. (There may, however, be different selling prices for interests in an existing note if the differences are reasonably related to changes in the market value of the loan which occur between sales of the interests.)

Licensed brokers can also offer these "fractionalized" promissory notes through an offering that has been qualified and registered by the Department of Business Oversight (DBO) and have obtained a permit. Pooling of investors' funds are not allowed except as authorized with a DBO permit. Licensed brokers can also offer "fractionalized" promissory notes through private placements as authorized by the Corporate Securities Law. If a permit or private placement is used, the "multi-lender law" will not apply. A broker should advise you under which of these authorities the offering is being made to you. If not you should ask!

The documents and instruments will be substantially the same whether your investment is in a whole or fractionalized promissory note and deed of trust. When funding a loan or purchasing a promissory note you should receive:

the promissory note;

the deed of trust;

the assignment of deed of trust and assignment or endorsement of promissory note (if applicable);

the preliminary report;

the appraisal report;

the loan application and related documents previously described; and

the policy of title insurance describing the coverage you selected.

In addition, if the loan is negotiated by a mortgage loan broker you should receive a lender/purchaser disclosure statement (LPDS) prepared in accordance with California law. A properly completed LPDS will identify: the mortgage loan broker and his or her representative; the amount and terms of the loan to be funded or purchased; whether the loan terms include a balloon payment; any servicing arrangements; and information about the borrower, including employment, income, credit history, and credit references.

The LPDS will also disclose to you the status of all existing encumbrances or liens against the Property, including whether any payments are delinquent, whether any notices of default (NOD) or notices of trustee’s sale (NOS) have been recorded, and whether there are any bankruptcy proceedings or active lawsuits involving the borrower or the Property.

You will also receive, as a part of the LPDS, information about the Property, including its address and/or assessor’s parcel number and legal description (if available); the age, size, and type of construction of any building improvements; an appraisal or, if you (the lender or note purchaser) have waived the appraisal, the mortgage loan broker’s written estimate of market value. When the Property’s income is the primary source of payment of the debt service, you will receive income and expense information.

Further, the LPDS will list the encumbrances and liens which are to remain against the Property and those encumbrances and liens which are expected or anticipated after your loan has been funded or the promissory note has been purchased. The loan- to-value ratio should be calculated for you so that you may determine the borrower’s equity and the protective equity in the Property (remember, they are different).

Finally, the LPDS will identify the mortgage loan broker’s capacity in the transaction: whether he or she is acting merely as an agent in arranging the loan or the sale of the promissory note; or whether the broker or some related entity is the owner and/or seller of an existing promissory note or the borrower of the loan funds.

If the loan is fractionalized, the LPDS will include:

• The name and address of the escrow holder.

• The anticipated closing date.

• Descriptions and estimated amounts of the costs payable by the lender (or purchaser) and borrower (or seller).

• For the sale of an existing note: the aggregate sale price; the percent of the premium over, or discount from, the principal balance plus accrued/unpaid interest; and the effective rate of return if the note is paid according to its terms.

• The estimated closing date of a loan origination.

• The mortgage loan broker’s explanation if certain statutory loan- to-value limitations are exceeded. [Business and Professions Code Section 10238(h)]

• The broker’s (or his/her affiliate’s) interest as a principal in the transaction, as limited by statute. [Business and Professions Code Section 10238(e)]

• Any other information known to the mortgage loan broker and necessary to clarify information in the LPDS.

6. Loan Servicing 

In the case of “whole” promissory notes, lenders and note holders may decide whether to handle the loan servicing themselves or authorize by written agreement a servicing agent (i.e., a person licensed as a real estate broker or a person exempt from that license requirement). In contrast, a servicing agent must be retained/authorized for a transaction which falls under the multi-lender law. See Business and Professions Code Section 10238(k).

Loan servicing includes collecting payments from borrowers, disbursing payments to lenders or note holders, mailing appropriate notices, monitoring the status of senior liens and encumbrances, maintaining adequate insurance coverage(s), and coordinating foreclosure proceedings.

A servicing agreement must provide that payments received are to be immediately deposited into a client trust account and forwarded to the lender(s) or note holder(s) within 25 days after the agent receives them. The servicing agreement should identify the person who has the authority to instruct the trustee under the deed of trust to proceed with and record an NOD or an NOS and should further identify whether that authority vests in the servicing agent or is retained by the lenders or note holders. Also, provisions should be included requiring the servicing agent to: record requests for notices of delinquency (if applicable) and requests for notices of default from senior lienors; notify you within 15 days of recording of any NOD and/or NOS; notify you within 15 days of receipt of any payment equal to or greater than five monthly payments; and notify you within 15 days of the day upon which any installment becomes delinquent for over 30 days.

The servicing agent is also required to provide certain accountings to you detailing the principal balance at the end of each year and the collections and disbursements received and made during each year Many brokers will request the original promissory note and deed of trust be delivered to the servicing agent (who may be the mortgage loan broker) to be held on behalf of the lenders or note holders during the term of the servicing agreement.

Note: It is important that the original promissory note and deed of trust together with any applicable assignments or endorsements be delivered first to you or to an independent custodian on your behalf (or on the behalf of all of the note holders) prior to the delivery of these documents to the servicing agent (who should provide you with a written receipt).

For multi-lender transactions, the servicing agreement must also require that the servicing agent’s trust account(s) be inspected at three- month intervals by a CPA (with follow-up reports to the servicing agent and the Real Estate Commissioner) if:

• The total of payments due in any three consecutive months exceeds $125,000.00; or

• The number of persons entitled to payments exceeds 120.

The servicing agreement should set forth the servicing agent’s compensation. Many MLBs who service loans retain a portion of the interest rate being paid by the borrower on promissory notes being serviced. The servicing agreement may also permit the MLB to retain the late charges and/or prepayment penalties as consideration for loan servicing activities.

Finally, the servicing agreement should describe how and under what circumstances you or the servicing agent may terminate the loan servicing agency. For example, the provision regarding termination should require written notification, a minimum notice period (e.g., 30 days), the signature of all or a majority of the lenders or note holders, and/or the payment of a cancellation fee (liquidated damages).

 7. Recovering your investment when the borrower fails to pay

Lenders and note holders are not always anxious to foreclose. As a result, it is not uncommon for loan payments to be several months delinquent prior to the commencement of a foreclosure.

Frequently, the borrower who is delinquent on your loan is also delinquent on senior liens. Even though your loan may be current, the borrower may fail to maintain the payments on senior liens, such as taxes, insurance premiums, and/or deeds of trust. A breach of or default in connection with a senior lien by the borrower constitutes a default under your deed of trust. It is, therefore, important that the status of all senior liens be monitored.

Prior to investing in a junior deed of trust, you should have determined the amount and the debt service (payments) required to maintain the senior lien(s). To protect your investment during any senior lien (loan) foreclosure, it may be necessary for you to maintain the payments (with your own funds) on all senior liens. Curing a senior lien default may not eliminate the need to continue to maintain the payments required by the senior lienor while your junior deed of trust is being foreclosed.

When you are a junior lienor, you should be prepared to cure senior lien defaults and to pay senior lien delinquencies. In this regard, you should determine if you have adequate resources to cure senior lien(s) in case of default before investing. A delay in paying the delinquencies may cost you (or other junior lienors, if any) more money to protect your interest in the Property. A prompt commencement and processing of the foreclosure should limit the amount necessary to advance (pay) to cure senior lien defaults and to maintain the senior lien(s) without delinquencies until conclusion of the foreclosure sale.

Note: Unless you are prepared to pay the entire amount owed on a senior lien (loan), the due date of your junior lien (loan) must precede the due date of the senior.

If the Property produces income, you may elect to collect the rents and profits during the foreclosure process to help maintain senior lien (loan) obligations. As additional security for your loan, you should have received an assignment of the rents and profits (usually contained in the deed of trust).

Note: Self-help” in collecting the rents is generally not effective. You may need assistance from legal counsel to petition a court for either mortgagee-in- possession or the appointment of a receiver to collect the rents and profits.

In a “fractionalized” investment, it is necessary to obtain the concurrence of more than 50% of the lenders or note holders (measured by the amount of ownership interest rather than the number of lenders or note holders) to commence and direct the foreclosure process. The servicing agent should contact each of the other lenders or note holders for you. However, you should be able to directly contact the other lenders or note holders when necessary.

When foreclosing a deed of trust, all sums owing and secured by the deed of trust are accelerated and immediately become due regardless of the maturity date identified in the promissory note, provided that an acceleration clause is included in the promissory note and/or deed of trust.

Trust deed investments can provide an excellent return on investment  (ROI) but remember, the risk of a trust deed investment is yours. You may wish to discuss the investment with an Mortgage Loan Broker and/or other qualified professional before committing your funds!

Contact Us Today

For investor information, contact:

Dorothy Reik
President
Bankers Group
Cell: 310-291-1300 (call or text)
Home: 310-455-4050 
Office: 818-226-6100
dorothy@bankersgroup.us
CalBRE Lic #01233829 
NMLS Bankers Group ID #294230 
(B&P 10140.6(b); Regulation 2773). 

Bankers Group is located at 5311 Topanga Canyon Blvd Suite 201, Woodland Hills, CA 91364.

Bankers Group works with homebuyers on conventional home loans and hard money loans in Topanga, Woodland Hills, Calabasas, Malibu, Pacific Palisades, Santa Monica, Venice, Brentwood, Westwood, Beverly Hills, West Hollywood, North Hollywood, Hollywood, Valley Village, Laurel Canyon, Coldwater Canyon, Burbank, Encino, Van Nuys, Sherman Oaks, Reseda, West Hills, Canoga Park, Agoura Hills, Thousand Oaks, Sylmar, Oxnard and the greater Los Angeles area.