I purchased the course from ebay, which consists of the live audio recordings, some sample docs and the 3-day event PPTs..
My understanding is the course is based on fairly high level note and trust deed knowledge. It involves wraps or AITDs, sometimes hypothecation, some shared appreciation mortgages (equity kickers). What follows is a simplified version that has been translated through my limited vocabulary and math skills. I do have experience in mortgages and note purchases as well as levering notes via hypothecation.
You really need to have an idea on how mortgage/trust deed law works and have someone on your team of 3rd party providers who knows how to draw up these type of uncommon, but completely legal, types of security instruments and notes. TBC recommends using a mortgage broker to write up the notes and TDs/Mortgages. In fact TBC recommends you rely on your 3rd parties heavily and remain strictly as a lender.
TBC recommends all the transactions (in the beginning) only be made on NOO investor loans on SFR 1-4 type properties. 6-12 mos, velocity type hard money loans. A big feature to remain compliant is to establish a relationship with at least 3 hard money brokers who know how private lending works, before even moving past go. This is very important. During your meeting, you will find out your hard money brokers parameters, how they work, if the use private money or institutional capital, rates, points they expect, lien positions they'll entertain, will they service the loans etc..
One VERY basic transaction involves agreeing to lend no more than 65% LTV (of a $100,000 purchase price) to a borrower who agrees to 12% I/O and 4 points. You let your hard money broker know you have a deal, the total loan amount is 65,000. You then ask your broker if they will do a first at $58,500 and 10% I/O (58.5% LTV ) and you will come in with a $6500 (65% CLTV) second lien. Broker gets the points for taking the application, writing up the docs and processing etc..Doing this keeps the loan compliant. It's VERY VERY important to go through a broker for qualifying etc.. Pass your borrower to your broker to get processed. Don't take the app or pull credit etc.
There are a few ways this can split from here, but an interesting scenario involves you telling your broker that you want the second lien to be an AITD (wraparound mortgage) of the total $65,000. Basically wrapping up the broker's first and your $6.5k second. You get the arbitrage on the payments, unless you ask for discount points. Both front and back-end points will affect your yield positively. Especially if you truly turn the loans within 6 mos. to a year.
There is also an opportunity to use an AITD with a shared appreciation mortgage, where you maybe take a piece of the profits at sale or refinance in exchange for a higher LTV or other concession.
Servicing is setup on the wrap to get the full monthly payment on the $65,000 loan, with the underlying first payment being paid, then the balance of the payments being paid to you on the 2nd.
A basic basic sample might look something like this:
- $65,000 loan amount at 12% I/O
- Payments $650 month
- Broker's 1st lien for $58,500 - 10% I/O -- $487.50 mo or $5850 yr..
- Your 2nd lien for $6500 -- Rate arbitrage balance $162.50 mo or $1950 yr.
It's important in this course to always compare loan constant, yields, as well as rates. Where as most will look just at the rates and try to arbitrage solely on that.
Looking at your yield on the spread, you receive $1950 after 12 mos. -- a 30% yield on your money.
What if you receive one discount point at closing on the entire deal? Just because you’re a private lender and you can. One point of $65k would be $650. At 12 months, your yield on your initial investment of $6500 just jumped to $2600 or 40%.
Now what if you borrowed your initial investment of $6500 at 15%? That’s $975 that you owe annually, reducing your 12 mo. yield to $1625 or 25%.
There are many more ways, aside from using a wrap to make this work, including additional yield plays like an equity kicker.
There’s a reason this is called The Banker’s Code. If you’ve watched Money As Debt, you’ll see how banker money works, creating cash out of thin air.
This is just the beginnings of my understanding on this and I am no expert, though I do work in loans.
A couple things come up for me. Finding good, ethical mortgage brokers that understand the way you work and are willing to stay on with you as a lender while you bring them solid, low LTV borrowers. I don't see, however, many institutional lenders allowing a 2nd lien behind their senior lien. So if your hard money broker happens to source institutional funds as senior debt, the AITD strategy or even a 2nd lien won't work. So that's something to verify with your broker, if they originate or allow 2nds.
I also see the need to stay within Dodd Frank and the SAFE act by letting the licensed mortgage broker originate these loans. There may be some overkill and uncertainty if or what types are licensing are needed, so a good RE and/or securities attorney is needed to figure that out in your locality.
I also see some possible disconnect with some areas of this type of deal when you have borrowers, brokers or title agents who simply can't or won't understand some of these types of notes and trust deeds/mortgages. What we don't understand, we reject. And if you've ever tried to present a creative deal to a residential realtor, you can see the possible difficulty. TBC's strategies rely on a certain type of timing and sequence as well as working with professionals with experience in alternative ways of working with paper.
Have fun..once again I'm not a part of TBC, I don't work for them and have a VERY basic understanding of this course and how it works. I'd love feedback on the enormous amount I may have missed.
Thanks for indulging the long post..
