How California Hard Money Investors Can Maintain Control – And Why It’s Critical
We all like to feel as if we’re in control of our lives, whether it’s our personal lives or our professional lives.
One important area where those two intersect is in our financial lives. To be able to keep our personal lives headed in the right direction, we need to exert strong control over our finances, and very often those financial resources are created by our professional lives.
While so many investment vehicles seem to be careening out of control today – traditional security investments especially – many forward thinking and savvy investors are turning to California hard money lenders to invest a significant portion of their portfolios in First Trust Deeds.
In the big investment picture, when it comes to investing in hard money, California investors are demonstrating their desire to have better control over their returns and their stability. I’m going to quickly explain why this is so, but then I want to drill down a little more deeply into the subject. I will show you that even after you have made the decision to invest in California hard money loans, how you can maintain control of individual investment decisions and why this is so important.
It’s no secret that the stock market – as measured by virtually all of its indexes – has been on a roller coaster ride. I’ve written about this several times, including an article I recently penned after the Dow Jones Industrial Average gave up all the gains it made throughout the year in basically one day.
And the funny thing (funny in the odd and unusual sense of the word, not the laugh-out- loud-sense) is that things have been even more sketchy since then, with 300-plus points swings up and down almost a daily occurrence at times.
As one of the most experienced local hard money lenders, our California investors have been looking at this craziness as they have continued to enjoy steady returns on their investments. It has proved to be very prudent to have a good portion of your investments in California hard money loans in the current global financial environment.
Before I go into more specifics about how our investors are able to maintain control of their finances, let me quickly outline what I mean by consistency as it applies to ROI. Right now our investors are typically enjoying double-digit returns on their money. Those returns are paid out monthly, so when investing in hard money loans on California real estate our investors can essentially count on receiving a check – or direct deposit to their bank accounts – for the amount of the interest on the loan they have underwritten.
A set up like this, of course, is ideal for a great many people. The money itself can be reinvested, used as supplemental income, or be handled in a number of other ways.
Control your California hard money loans
With the basics explained, let’s look a little more closely at the steps you need to take in order to control your investments in California hard money loans and why this is so important for your financial security.
When I told you above that our investors are typically seeing double-digit returns on their money, some of you may have said to yourself, “This is a pretty high rate for a real estate loan” and in many ways you’re exactly right in that assessment.
California hard money loans are, by definition, higher interest rate loans. California hard money lenders work with borrowers who are considered a higher risk and we fund loans more quickly than any of the conventional lenders. Of course, with any investment there is a risk-reward trade off. If you don’t want to take any risk with your investments, tuck your money away in a bank savings account…although don’t load up any single account with a sum greater than the FDIC will insure.
When working with hard money lenders on San Francisco, Los Angeles, and Orange County Trust Deeds, it’s important that you understand what the risks are and that you have the ultimate control over your investment decisions. Let’s look at the risks and “control points” for several important areas.
‘Pooled’ California hard money loans
Trust Deed lending involves three parties: the borrower, the beneficiary (that’s the investor, which could be you), and the broker (that’s us at Evoque Lending). The broker does most of the hard work bringing everything together. Potential borrowers come to us and we apply all of our experience and knowledge to determine which are good deals and which are too risky.
Some brokers will pool money from several investors to fund a loan. This may, on the face of it, seem fine. However, at Evoque Lending we believe there are both obvious problems and hidden problems with pooled California hard money loans.
Let me start with the more subtle, or even hidden, problem with this approach. Because the broker is dealing with an “unorganized” group of investors, the real control becomes invested in the broker. Here’s a hypothetical example: A broker has what some might consider an “iffy” deal and he presents it to five investors. None of the investors is “all in” on the investment, so none of them see themselves as taking all the risk. Even if one or two decline, the broker may be able to find other investors who would make up the slack.
Simply put, the authority – or control – of each “pooled” investor is diluted and this tends to give the broker too much flexibility.
At Evoque Lending we believe that when a single investor is responsible for making the funding decision on a single Trust Deed, it best protects the interests of the investor. This is why we do not do pooled California hard money loans.
The more obvious problem with pooled loans occurs whenever a decision needs to be made about a loan. If you are the sole investor in a California hard money loan, your vote counts for 100 percent of the decision that needs to be made. If you find yourself in a pool of other investors, your control is diluted and you’ll have to go along with a majority decision, even in cases where you disagree.
Our system for giving investors control
As I said, we work exclusively on a “one investor to one Trust Deed” basis. This means that when you fund a California hard money loan with us, all the authority rests with you. If a Trust Deed we present doesn’t fit your requirements, you can pass. There’s no pressure from any other potential investors in a pool.
I should also say that the California hard money loans we present to our investors are accompanied by a comprehensive packet of information that enables them to make sound decisions. By the way, we get hundreds of loan applications and most don’t make it through our thorough vetting process. Our investors only see proposals that we have pre- qualified after:
– Screening the borrower by an experienced Evoque Lending loan officer. This includes a thorough review of liquidity and a personal interview.
– Receiving a preliminary title report. We need to see if there are any judgments or tax liabilities, as well as other important details.
– Receiving a professional appraisal of the subject property. The value of the property is critical because we maintain strict equity requirements to protect our investors.
California hard money loans: First position
There’s another critical element of California hard money investing that you need to understand and that is the “position” of your Trust Deed. You may have noticed that more times than not, I have specified “First Trust Deeds” as I’ve been discussing your need to control your investments.
After being in this industry for more than 15 years, I believe that for almost every investor, it’s extremely important to limit investments to First Trust Deeds. A First Trust Deed is simply the Trust Deed that has been filed first on a given property. You won’t see a stamp on it anywhere declaring it as the first. Another Trust Deed could be filed on the same property the next day and that would be a “Second Trust Deed.”
If a borrower defaults, it’s extremely important to hold the first position because in reality, only the holder of the First Trust Deed has any control over the situation. (By the way, the tax man – if taxes were owed – would get paid first in any case. This is why that title report is so important; it would discover unpaid tax bills.)
If an L.A. borrower were to default on his hard money loan, the Los Angeles county court house would likely be the site of an auction to sell the property and pay off the debt owed. Whoever holds the First Trust Deed gets paid first. Bidding would start at an amount that would recoup the money owed plus other expenses incurred due to the default. If a bid were received for that amount, you would get all your money back. If that amount wasn’t bid, you would get the property.
But the important part is this: In each of the two cases mentioned above, anyone holding a Second Trust Deed takes the risk of possibly getting some or none of their money back. The lesson is simple: If you want to maintain control of your California hard money loan investments, limit yourself to First Trust Deeds.
Control plus safety equals success
I wanted to make the main focus of this article the importance of maintaining full control of your California hard money loan investments, but I feel that I should also briefly discuss what we do at Evoque Lending to help assure the overall safety of your money.
We think that our approach and our experience put us among the very best California hard money lenders. After all, we’ve been doing this successfully for more than 15 years. When it comes to hard money loans, California borrowers and investors have come to trust Evoque Lending.
I touched on this briefly above, but let me expand on it a little: We build “protective equity” into all of our First Trust Deeds. Generally this is around 40 percent. In other words, the borrowers we work with have equity in their properties so if they would ever choose to default, they would be walking away from a substantial amount of money.
After our thorough vetting process – where we determine a borrower’s ability and willingness to make payments – this is our next line of defense to protect the interests of our investors.
Of course, every investor’s situation is somewhat different. We deal with individual investors (including those working to build their retirement accounts), professional investors, real estate professionals and institutional investors.
If you believe that investing in hard money loans on Los Angeles, Orange County or San Francisco area real estate might be good for your portfolio, please give me a call or send me an email. I would feel privileged to have the opportunity to answer your questions.