Borrowing funds to buy NPN

[Erick V.]

When you borrow money to purchase notes, how is that personal loan secured for the person lending the money. I have a person willing to lend me money to purchase npn but he wants to know how he's loan is secured since there is no deed yet. I know all about hard money lending for properties but not much on lending for notes.

[Doug Smith]

@Erick V. There are quite a few ways that it can be done. I'll touch on a couple:

1) Some note lenders require that a separate LLC be set up that is either fully-owned by the lender or is partially owned by the lender. The note is then purchased in the name of that LLC with contractual language that states that, upon liquidation of the asset, the lender is paid their principal and interest before you, the investor, get to take your money. Sometimes there is even a profit participation that the lender takes.

2) In addition to the security agreement, an assignment of mortgage can be completed and held by either the lender or an escrow agent that, in the event of a default, the assignment can be filed and the lender becomes the new owner of the note.

3) I've also seen other lenders simply have you sign a security agreement along with the note without taking an assignment, but this is pretty rare.

4) The lender could use the entity that the asset is purchased in as collateral. In the event of default, they can exercise their rights against the owning LLC/entity that owns the collateral.

Those are the most common I have seen. Traditional banks often do not understand note investing like they do direct real estate investment. In many cases they want to include an Account Control Agreement of sorts to limit your ability to sell notes or REO that might be collateralized without their permission. Make sure you understand the security agreement.

Erick, I hope this helps a bit. It's not like securing real estate.

[Erick V.]

Thank you Doug. Do you think any Real Estate Attorney would know how to draft up such security agreement?

[Doug Smith]

I do know a few. Let me get you some names.

[Dion DePaoli]

If two investors (debt and/or equity) come together and form an LLC which is used to purchase mortgages, that join will be governed by the Articles of Incorporation and Operating Agreement of the entity. Within the operating agreement, powers, roles and rights, like any standard company, can be detailed. This is stand company structure stuff.

If one investor has a LLC which they desire for the mortgages to be placed into, the other investor must be cautious on how they join in as some manager of the assets. The act of negotiation between a borrower and the mortgagee requires a license. If you are a third party manager, you will need a license since you do not have an ownership interest in the mortgages.

Creating escrow assignments and allonges that are a thrid party to the ownership entity of the assets can be deemed to break the chain of ownership and is not a recommended strategy. This event can then create an affirmative defense for a borrower against foreclosure or can seriously affect the value of the mortgage in the secondary market under the same guise. Assignments and allonges must be received and assignments must be recorded as a function of sale which is usually demanded in the purchase and sale contract. In the idea of a NPN, this will also be required in order to substitute a plaintiff in a foreclosure action or other legal matters.

A debt investor who provides capital and then places a security instrument in place such as a UCC lien will have other issues in regards to UCC regulations. Collection per the UCC lien may not result in the ownership of the asset. In addition, the UCC lien may not provide powers to direct the assets if the relations go south.

These are some but not all of some of the issues. Creating shells to structure this type of transaction can void any warrant or create false statements in the representations of the purchase and sale contract for the loans. Or worse, be deemed to be selling a security with no license.

The OP lists a 'person', assuming it is third party and not family, this could be problematic if something were to arise between the two parties. Mortgage investing is not like real estate investing. It is pretty easy to veer off the line and have some serious impact on collect-ability, enforce-ability and partnership arrangements.

Not trying to scare, but I would suggest talking with multiple counsel on the matter and fully understand all of the moving pieces.

[Account Closed]

The best policy is used your own money to purchase notes.

Joe Gore

[Dave Van Horn]

Hi Eric,

Just use a "Promissory Note" and a "Collateral Assignment of Note and Mortgage".

The Promissory Note spells out the terms between you and your private lender.

The Collateral Assignment along with a legal description gets recorded in the county courthouse where the property behind the note is located. This is done to perfect the collateral for your lender. You can also include a 'substitution of collateral clause', in case the borrower were to sell or refinance prior to the maturity date on the note with your private lender.

Best,

Dave VH

[Erick V.]

Thank you Dion and Dave.....Dave I'll ask an attorney about the collateral assignment of note and mortgage. Thanks for the reply.

[Bill Gulley]

My suggestion is not to do it, but whatever, you're in Miami, get in the car and go see Dion and buy him a great lunch and have him look at your deal. He may point you in the direction of an attorney. I suggest you not do any conduits or collateralized lending as you'll probably need a license, you do have yours to loose too. :)

[Erick V.]

Originally posted by @Bill Gulley:

My suggestion is not to do it, but whatever, you're in Miami, get in the car and go see Dion and buy him a great lunch and have him look at your deal. He may point you in the direction of an attorney. I suggest you not do any conduits or collateralized lending as you'll probably need a license, you do have yours to loose too. :)

You lost me here man. You're saying I need a license to borrow money so I can buy notes? The notes I would be buying would be under my name or my companies name. I'm not really looking to form a "parnership" or a new company together with the 'lender'. (the lender is a person, a regular person with extra money).

[Bill Gulley]

Originally posted by @Erick V.:

Originally posted by @Bill Gulley:

My suggestion is not to do it, but whatever, you're in Miami, get in the car and go see Dion and buy him a great lunch and have him look at your deal. He may point you in the direction of an attorney. I suggest you not do any conduits or collateralized lending as you'll probably need a license, you do have yours to loose too. :)

You lost me here man. You're saying I need a license to borrow money so I can buy notes? The notes I would be buying would be under my name or my companies name. I'm not really looking to form a "parnership" or a new company together with the 'lender'. (the lender is a person, a regular person with extra money).

Borrowing funds to purchase a note as you stated is a brokerage operation and requires a license. Giving a collateral interest in notes can be a securities violation. Buying notes in a business name as a function of business can also require a license. You need a finance type attorney, not a real estate type per se, to guide you. Don't get legal advice off internet forums, that's IMO.

Buying notes as an investment can be done with your own money, that's investing, using other's money can be done if you place your other assets at risk, like getting a car loan and then use those private funds, but borrowing as you described is a business venture, that's a brokerage activity. Check your state laws as well. Again, you're very close to Dion, drive on over there. :)

[Dion DePaoli]

@Bill Gulley

By now I am certainly aware of your stance on the matter. We do not see eye to eye on the matter. I won't throw stones at you on the matter and I sort of expect the same. You know, a little more professional conduct. Express your concern so that any reader can understand the risks they face according to you and your experience, that is fine, and I will do the same, but let's not have these pseudo personal attacks when these questions come up. It's not becoming of either of us.

Thanks

DD

[Bill Gulley]

Originally posted by @Dion DePaoli:

@Bill Gulley

By now I am certainly aware of your stance on the matter. We do not see eye to eye on the matter. I won't throw stones at you on the matter and I sort of expect the same. You know, a little more professional conduct. Express your concern so that any reader can understand the risks they face according to you and your experience, that is fine, and I will do the same, but let's not have these pseudo personal attacks when these questions come up. It's not becoming of either of us.

Thanks

DD

Well, I spent 30 minutes out of the life I have left answer that and lost the whole damn thing on here, not happy.

define INVESTOR legally, that will lead you to a better understanding.

When you do something that is funded in any manner what so ever from funds that are not yours or which are not placing your assets at risk, those assets owned prior to any transaction, you are not an investor. INVESTORS place THEIR ASSETS AT RISK, PERIOD.

All the folks on here who don't have two nickels to rub together want to refer to themselves as investors, so do those with some money who deal in RE or any other business, but they are OPERATORS or DEALERS, they are nothing near an INVESTOR.

You and other brokers do all kinds of activities in notes, you use other peoples money in various ways, you also have a license, or I hope they do, and have regulatory oversight somewhere, but individuals must use their own freaking money or assets, borrowing funds beyond their means to conduct note transactions is brokering.

I have no idea what may have been said that got that response from you, but if you disagree with what I said here you need to drop way back to some basic legal definitions.

The reason so many people on this site don't get it is because they never start from ground level, they assume they know and jump in to something assuming things. To assume makes an *** out of U and ME, as they say. A brokers license or being regulated under state law provides cover to brokers or operators that is not afforded to those wanting to call themselves investors, those in the business need to recognize that. :)

[Dion DePaoli]

@Bill Gulley , I hear you and I understand what you are saying. I am familiar with the definitions of investors, no need to go there. Not interested in hijacking the thread on this topic. If you want to open a thread under your points, happy to contribute to that one.

The two references you made seemed to be shaded with a derogatory tone for some reason which I didn't really understand so I fired back. Perhaps they were not meant that way but the second one enforced the idea. I just didn't think that tone was properly placed.

[Erick V.]

Originally posted by @Dion DePaoli:

@Bill Gulley , I hear you and I understand what you are saying. I am familiar with the definitions of investors, no need to go there. Not interested in hijacking the thread on this topic. If you want to open a thread under your points, happy to contribute to that one.

The two references you made seemed to be shaded with a derogatory tone for some reason which I didn't really understand so I fired back. Perhaps they were not meant that way but the second one enforced the idea. I just didn't think that tone was properly placed.

I was wondering why he kept referring me to you in that manner but now I see you guys got history. ha.

I'm gonna keep doing my research but I'm sure someway, somehow, its legally ok to borrow money to buy notes.

[Bill Gulley]

Originally posted by @Dion DePaoli:

@Bill Gulley , I hear you and I understand what you are saying. I am familiar with the definitions of investors, no need to go there. Not interested in hijacking the thread on this topic. If you want to open a thread under your points, happy to contribute to that one.

The two references you made seemed to be shaded with a derogatory tone for some reason which I didn't really understand so I fired back. Perhaps they were not meant that way but the second one enforced the idea. I just didn't think that tone was properly placed.

Dion, there was no "tone" meant toward you at all. The second time is for emphasis I'm not meaning to yell, mostly the emphasis is made for Erick, you mentioned license requirements :)