Trust Deeds

[Barry Phillips]

My partner and I are venturing in to trust deed investments.  I've subscribed to several organizations and have come across some opportunities where we can take 50% of the loan.  If there are two parties, who has first position if the borrower defaults on the loan?

Thanks.

[Joffrey Long]

Barry,

Great question.  

The answer is "neither."

Holders of fractionalized interests in the same deed of trust share lien priority rights as to other junior or senior lien holders, but not as to each other.

As "co-tenants" or holders of interests in fractionalized trust deeds, they don't necessarily have any priority (to the extent of lien priority rights) over each other.  When they foreclose, or if their secured interest is foreclosed out by a senior lien holder, they "win or lose" together, members of the same "team."

It is true that the "majority interest rule" may affect decision making when dealing with interests in fractionalized trust deeds.  But where it can affect decision making rights among holders, it doesn't give any holder any priority over the other holders.  

Holders of interests in multi-lender loans own the trust deed, and in the event of foreclosure, the collateral, in accordance with their percentage of ownership.

Your question is very good, and draws attention to an area our industry probably needs to explain better to the investing public.  I'll likely add your question and the answer to my web page, www.FractionalizedTrustDeeds.com which you may want to look at, as well.

I hope this answer was helpful.

Joffrey Long

Fractionalized Trust Deed Lender/Investor/Broker

[Rick H.]

@Barry Phillips The concern you express became an industry problem that was addressed about 20 years ago through legislative action. However, it was intended to solve the problems associated with majority owners of fractionalized interests being restricted by the lack of action or decision-making of minority owners.

Have equal interests can be a disadvantage if a stalemate exists and your partner, when an entity or natural person, has different plans. 

When I was actively brokering private money loans to investors, I 'experimented' with partnering up. With an equal interest or smaller interest, it seems I always ended up doing the loss-mit work if things went sideways later. 

The solution was to take a piggyback junior position trust deed note recorded concurrently with the senior. There are obvious disadvantages to this method as well.

If you are a capital guy and not a hands-on problem solver, you ought to create either an operating agreement for your note partnership, a formal entity, or just buy without partners (which was my ultimate solution, many years ago). 

[Jay Hinrichs]

@Rick H.

  I ran into this problem in the crash of Bay Area prices in 1989 to 1992.. at the time all of our loans were fractionalized.. normally the co bene's had no problems making a decision together and moving forward..

The issue came on a loan I had on a high end home ( in the day it was valued at 2 mil) on Green st in SF... first was a BOA  at 900k and we were a 200k second.. the market if you recall in the Bay area in those days crashed 50%... so we had 4 bene's 50k each.. 2 wanted to foreclosure the other two said I am not throwing good money after bad.. the other two could not buy out the hold outs.. and they let themselves get wiped out... this with a property that would have rented even in those days for north of 5k a month and would have cash flowed.. but no talking them into it, they all got extinguished when BOA foreclosed them out...

NOw I am not familiar with the legislative action you speak of as I sold out in 1992... but I do remember that one distinctly because of my loss mit  with my clients was very frustrating.. and unfortunately I did not have the 200k to just buy them all out ... that property sold in 1996 for 5 million... try as I might I could not talk sense into the hold outs:(

[Barry Phillips]

Gentlemen,

Thank you all for your insight and information.  We will continue to approach fractionalized deals with caution.  We know we have some reading to do and will stick to 100% ownership for now.  I'll visit your websites and look forward to learning more from you.

Cheers,

Barry

[Account Closed]

@Jay Hinrichs

Did they have a personal guarantee?  Were they ever able to collect anything?

[Jay Hinrichs]

@Account Closed

you will find in lending on a HML scenario that PG's are worthless.. this was a highend builder rehabber than went TU

[Account Closed]

Originally posted by @Jay Hinrichs:

@Rick H.

  I ran into this problem in the crash of Bay Area prices in 1989 to 1992.. at the time all of our loans were fractionalized.. normally the co bene's had no problems making a decision together and moving forward..

The issue came on a loan I had on a high end home ( in the day it was valued at 2 mil) on Green st in SF... first was a BOA  at 900k and we were a 200k second.. the market if you recall in the Bay area in those days crashed 50%... so we had 4 bene's 50k each.. 2 wanted to foreclosure the other two said I am not throwing good money after bad.. the other two could not buy out the hold outs.. and they let themselves get wiped out... this with a property that would have rented even in those days for north of 5k a month and would have cash flowed.. but no talking them into it, they all got extinguished when BOA foreclosed them out...

NOw I am not familiar with the legislative action you speak of as I sold out in 1992... but I do remember that one distinctly because of my loss mit  with my clients was very frustrating.. and unfortunately I did not have the 200k to just buy them all out ... that property sold in 1996 for 5 million... try as I might I could not talk sense into the hold outs:(

Something sounds so not right with the co bene situation in this example.  I understand the 2 benes who refused to throw good money after bad. But once BofA was all the way to notice of trustee's sale, why didn't the 2 benes who wanted the property buy out the other 2 for $500 each? Since they were bailing anyway, wouldn't they have taken a consideration to assign their interest in the note?

Now that I've written that, I realize that the 2 benes that wanted the property probably didn't have the funds to reinstate the 1st.  Undercapitalized owners of fractionalized interests in junior liens......yuck.

[Jay Hinrichs]

@Account Closed

  can't recall all the specifics it was 1989.. but it was something like that. or they did not want to double down.. it was frustrating ... I followed the property over the years and when it resold at 5 million mailed them a copy of the listing... 2 of the hold outs could have taken this on no problem.. ONe of them owned 2 acres next to Apple headquarters on Stevens Creek blvd  ( it was his bar and restaurant for years)   just stubborn dude is all I can remember.

[Rick H.]

Another play for a junior Bene with 100% control of that lienholder position is to get tg he partners to assign their interests to you.

Next, abandon the security by recording a partial reconveyance.

Then, sue your debtor.

The idea is to avoid getting wiped off if the sale of 1st won't produce surplus and still provide a future opportunity to negotiate with the debtor when the pressure is on and YOU have the upper hand. 

I have learned much more from my mistakes (and missed opportunities) than my successes.

[Heather Thompson]

Hi Barry,

It's two years later now, did yo end up investing in trust deeds? If so, how did you do it? I'm looking at doing the same, buying out of state loans so that I can have 100% of the 1st lien position.  Looking at a company called Secured Investment Corp.  Anything you can tell me is appreciated!  Thanks!