All Forum Posts by: Matt Huber

Unfortunately some are not just stories, they are personal experiences I wish I didn't have.  In some cases friends are enduring the pain.  After getting screwed a multitude of times, the lesson I've learned is to gain the knowledge yourself and manage your own investments.  No one will ever take better care of your money than you. 

 Some people are lucky and have great experience with others investing their money.  I actually had that for a couple years in the 1980s.  A manager whose fee was based on performance was picking gold ups and downs perfectly and making a great return for a couple years.  Unfortunately the market changed and he couldn't do it any longer.  He was honest and told his investors the game was over.  He had to change professions.  He was the only good financial advisor I ever had.  All others in 30 years lost me money.

No Eli, I don't have any experience with these larger funds.  I would think they are safer and (more) professionally run so one would assume a better idea and, in general, they probably are.  I'm sure there are good ones and honest ones you just have to find them.  Realize even honest companies may change to dishonest practices if/when conditions warrant.

Back in 1980 I invested in a third note on some farmland when interest was sky high.  I was getting 20% interest and very happy for the first 2 years.  The licensed company that made the loan started using new investment money to pay interest on existing loans.  I don't think they did that on my loan, but it didn't matter, they became insolvent, went bankrupt and I can imagine a few were sent to jail.  Ironically the name of the lender was Lemons and Associates.  How's that for a name!  Here's a link to the case:  

http://www.leagle.com/decision/198626567BR198_1207....

This was a VERY BIG case with 3,500 investors and 6,000 separate trust deed investments.  The first 2 years paid on time gave me 40% return, it then took until about 1987 to get the remaining 60% back via the bankruptcy process - that's all that was recovered and allocated to my claim.  In the end I was essentially made whole, but my money was tied up for 7 years to essentially get no return.

I guess I'd sum it up to say getting a bigger fund likely increases your chance at honesty, but you can never guarantee it.  You never have control and are always dependent on the decisions and actions of others where if you personally own and control and investment you will never cheat yourself, nor steal from yourself.  There is always an increased risk when the investment is outside your own personal control.  I suspect large REITs or companies that are publicly listed are about the safest you could get.  I've had newsletters mention Kennedy-Wilson and Howard Hughes Companies (or similar names, just going from memory) as companies with huge real estate portfolios with assets listed at cost that were acquired decades ago which have significant development potential.

Just know hedge funds and insurance companies are funding 6.5-8% interest loans right now so they, too, are having a hard time finding safe, secure returns.  I can and have gotten some of these exact loans.  If these multi-million and perhaps billion dollar companies are having difficulty finding good secure returns, its likely to be tough for you too.  You small size does give you an advantage in that you can pick smaller funds that wouldn't even move their needle so their are advantages to you too.  Clearly there are safe returns.  I know one investor claiming to knock it out of the park with tax liens and tax deeds and I think he's taking investment money.  I'd dip my toe in anything before jumping in whole hog and try to make sure your funds are secured.  I thought my loan in 1980 was secured with a specific deed of trust and it probably was, but shysters can do some amazingly creative things to screw you.

@Fred Weiller The answer to your question depends on the lender and broker.  My friend who has done this three times uses her brother as trustee on the deed of trust (mortgage) and her cousin as the lender.  In this case they all have the same last name.  I really didn't like that idea of everyone having the same last name, but it worked without a problem.

Without going into detail, it is far better to get the short term loan directly from your family member or friend than to provide the money yourself.   Providing the money yourself has issues of disclosure (which I recommend disclosing to the broker) plus may raise questions when the lender looks at your bank statement and wants to know why a large amount of money moved out of your account around the time of the purchase.  It may further make your qualifications look much worse if you send the money to the trusted party to loan back to you.

The first time my friend did this she gave a regular check to her cousin and it hadn't cleared when the wire was needed for the purchase, luckily her cousin had enough in her account to cover the loan before the deposited funds were available.  

I understand my friend is disclosing everything to her broker.  It's my guess the broker and lender have no problem with it because it follows the rules as it is a refinance.  Brokers and lenders all want to make the loan but if you buy with cash their hands are tied because the current convention doesn't allow it for 6 months.  I recommend talking to the lender (broker) with whom you plan to refinance prior to the purchase and make sure they're OK with it.  If they aren't OK, then find another broker/lender.  The idea is not to misrepresent anything as that could and may be loan fraud (depending if you over represent or under represent your qualifications).  You are simply using the current lending guidelines in a way that benefits you.  The broker/lender that agrees you are following the rules will make the loan, presuming you qualify with regards to other loan qualifications.  Different brokers/lenders may have different interpretations of the same thing, just like attorneys and accountants.  Find a broker that interprets their lending guidelines that works with the friendly loan, in fact you can ask them for guidance to make sure you do things they way they want to see it done.  They all have their guidelines, sharing them with you is not a secret.

Eli, you want passive income?  Here's another cautionary tale.

I have a friend that loaned via a loan promoter conduit which loaned in conjunction with or behind a formal (company) hard money lender.  One would think the hard money lending company in the business would have good safeguards and procedures to protect their own investment, but if you ***-U-ME, you turn both you and me into an ***.

It turns out the borrower built a house to close to the property line so has easement issues with the neighbor.  Worse yet the borrower built OVER a gas pipeline.  The group has foreclosed, and I don't know whether the hard money lender and add-on lenders are in the same lending group or separate, but I do know the group now has a lawsuit filed against the borrower.  Worse yet they have a really screwed up situation with 2 significant problems.  Perhaps moving the house is possible, even one with a slab, but that is a VERY EXPENSIVE proposition.  The gas line is a problem no matter how you look at it.  The cost to solve the issue could be astronomical and the cost to leave it as is and NOT disclose to the next party you sell it to has extremely high liability attached.  The other alternative is to disclose and sell as is and take a beating.

Every time you put your money into someone else's hands you are depending on them to do proper due diligence and be careful with your money.  Realistically you have no idea what they will do as past history is no guarantee of future performance.

I have a second friend, met here on BiggerPockets, who is doing very well.  She has loaned into this same loan conduit, albeit different projects.  I didn't know her well when she discussed this with me plus she knew and trusted the promoter of the conduit.  I was not in favor of the loan as she was already doing better with her own buys, so it made no sense to put money at a bigger risk with less profit.  I've given her the exact details of the problem with the other loan(s) that I learned of 2 months or so after she lent the money.  Believe me she is not happy she made the loans, even though they may turn out fine, and never plans to make hard money loans again.  She was too anxious to put her money to work that she made a decision where she had no idea of the risks involved.  Unfortunately, in my opinion, that occurs with almost every investment where you put money in someone else's hands - you have no idea what they will do, to whom they will loan, the experience and expertise of the borrower, etc.  

You can buy a lower value house in Texas for full price and turn around and sell it for 5-10% more with owner financing at 10%.  That would make you around even with closing costs and have 10% interest on a house you knew something about.  That's not my recommendation, just an example of something you can control and get a much better safe return than almost anything else in the U.S., at least with any degree of safety and that's a horrible way to do the deal.  I highly recommend investing only where you do your own due diligence and be satisfied.

https://www.biggerpockets.com/forums/88/topics/316...

Oops, here's the link

The "friendly loan" detail is  buried near the bottom of this very long post.  The discussions cover many different topics so you may want to go straight to the bottom if you just want to learn the "friendly loan" concept.

Eli,

I think that is a great way to lose your money.  Undoubtedly there are good funds and good fund managers, the problem is to find the right one.  I've invested in just about everything over the years, including using wealth managers at big banks and they lost my money faster than anyone else.

I've realized the only time I've ever lost money in my entire life is by putting it into someone else's hands.  No one will ever care about your money as much as you.  When you put it in a fund the fund manager typically makes more by getting a higher return for the fund hence they get rewarded for taking more and more risk to get that return.  If they fail, they lose YOUR money, not theirs.  The risk reward scenario is out of kilter because there is no down side to the fund manager to take greater and greater risks.  If they aren't going to make a fee for themselves anyway, why not take more risk?  At least that gives them a chance to make a fee.  They will not be looking out for your best interest, they will be looking out for their own best interest.

Two examples I've had: 1) a partnership where the 51% manager got his equity by finding the deal and the other 6 partners (including me) put in the money.  He tore down the house that was supposed to be remodeled and made it a new construction project without our knowledge and consent.  We knew we were now underfunded by the managing member refused to listen to the unanimous voice of the other 6 partners.  He thought he could do it "faster and cheaper" until 18 months later the cost of the hard money burned through his budget.  He had every desire to make more profit on the project and every incentive to make more profit, but as with a fund manager had zero risk for failure and drove the project into the ground.

Another example was where I lent money to a hard money lender who was very successful - once upon a time. He lent outside his area of expertise and got clobbered in the 2007/2008 housing crisis. My money was only secured by the guarantee of the company and the owner, not on individual properties. If I was secured by first liens on specific properties I would have been fine. As structured, he lost everything. Years later I found he illegally syphoned houses through relatives and employees into his IRA so there is a lawsuit with a shot at collection.

You, as with almost everyone else in the world, want to make residual income and apply zero effort.  You need to do it in a manner that you are totally secured or your likelihood of getting screwed is high.  Note investing is relatively easy.  You can do the due diligence and have nothing to do when payments are made.  If they default you arrange a work out or foreclose all of which can be handled by 3rd parties you pay to handle the situation.  You can create your own notes with owner financing as well.

There may be some good syndicators, but as with everything, circumstances can change everything.  Even an awesome syndicator that gets him/herself into hot water may change their primary focus if economic conditions require.

One thing I can promise you.  The thieves do not identify themselves for you.  The one where you lose money will be the smoothest operator, makes you feel comfortable, and you will be completely surprised when it happens.  As with my loan to the hard money lender, they can even start out with good intentions but conditions change so they take bigger risks or do things to protect their wealth while taking advantage of you.

Congratulations Thu, but I need to correct you.  You did not find a coach here on BP, you forced me to be your coach!  I am not actively looking to coach people and have no formal program to do so.  You are the exception and exceptional!  It is fun working with you.

As to Laura Richard's reply I complete agree you should NOT misrepresent anything to the bank.  Since most large financial institutions are federally licensed you may put yourself in federal hot water by doing so.  Further understand every state has different rules and interpretations, do's and don'ts and the rules often change so you are best to consult with a real estate attorney licensed in the state of interest.

There are only 2 ways to take control of a property subject to the existing lien: overtly or covertly; everything else is details.

Overtly is to write a letter to the bank telling them you have taken title to the property and put the named owner in the public records (deed) in any manner you want.  It is up to the bank to determine whether they want to foreclose or not, now or at some point in the future.  Their recourse is generally described in the loan document.  Ownership and security interest are not one and the same.  The lender's security interest remains even though the borrower transfers ownership.

Covertly is to put into a land trust and change beneficial interest.  It is trying to conceal the change of ownership. In that case I believe you should say NOTHING to the bank, simply do what you're going to do.  If there is a later discussion with the bank you should be honest with answers.  Transferring the title to someone else does not break the law, it triggers the right, but not the obligation, to utilize recourse agreed in a contractual agreement between a lender and a borrower.  The recourse of the lender is the right to accelerate the loan and begin foreclosure proceedings to secure the collateral for the loan.  Misrepresenting the situation is what can get you into legal trouble so don't do it.  

Realize the Garn St. Germaine Law was for estate planning purposes and if you transfer beneficial interest within a trust outside of those purposes that law will not apply and you will have none of the protections afforded in that law.  Strategically thinking, that is why people use the land trust as a "cloaking device" to hide the transfer.  They hope the bank thinks the transfer was within the rules allowed by Garn St. Germaine law.  Transferring beneficial interest in the trust, outside the scope allowed by Garn St. Germaine law, will be considered a violation of the due on sale clause in "conforming" residential home loans.

In Texas, with laws as they now exist, I have to believe the powers that be are fine with 3rd parties taking over houses from a distressed borrower and leaving the loan in place and are OK with that same house being sold with a wrap note.  Why do I say that?

In Texas when buying a house with an existing lien state law requires one of the following:

a) report the transaction to the existing lien holder   OR

b) close through a title company.

If it so important to disclose to the lien holder shouldn't that have been made a requirement and not simply one of two different alternatives?

Personally I believe the state title insurance industry lobbied for this law as they wanted to direct commerce through their own portal.  This law made sure those that don't want to report the title transfer to the lender must use a title company.  Which alternative do you think most choose?

"Subject to" and "wrap note" sales occur frequently in Texas with both transactions violating the due on the sale clause in the loan covenants.  These transactions follow state law and parties are able to purchase title insurance, naturally with an exclusion by the insurer pertaining to the due on sale issue.  If the transaction was not lawful, title companies would not be allowed to insure.

Like much else in life there is a right way and wrong way to do things.  Learn the right way and seek guidance from a real estate attorney, preferably one familiar with creative real estate investing, licensed in your state.  Be wary of guru's passing through your state because they may not be familiar with state laws.  Lastly, be cognizant advice given on Bigger Pockets is coming from people familiar with their own state, so that advice may or may not be valid or legal in your state regardless if the author is correct pertaining to their own state.  It is your responsibility to verify laws in your state.

@Eddie T. The complication is generally the underwriter and/or attorney for the title insurance company.  Title insurance companies have the right to decide which "risks" they will insure and thus they can put their own requirements on a transaction to let it qualify for the insurance they offer.  I bought two houses this year, from the same (very prolific) wholesaler, and used the exact same title company for both purchases.  I could NOT sell one house I bought through the same title company with the same unaltered trust and same beneficiaries 3 months later AND get a check in the name I needed.  In this case there was more than one beneficiary and the trust did not have its own tax ID.  The trust never needs a tax ID as it is a flow through entity, tax wise, unless it applies for its own tax ID.  The trust had multiple beneficiaries with multiple tax IDs so it was essentially a partnership for tax purposes.  Without a single tax ID, the bank I use will not allow me to open a bank account, hence I can not accept a check made payable to the trustee when named as trustee of the specific trust, and not as an individual.

For whatever reason some title companies INSISTS the check must be paid to John Doe, Trustee, XYZ trust even though the trust SPECIFICALLY STATES payment is to be made to "John Doe" and NOT as "John Doe, Trustee" and NOT as "John Doe, Trustee, XYZ Trust".  I can not deposit a check made out to the payee in the manner this title company insists so I would end up with a useless check unless I go through the extra effort to get a tax ID, or perhaps incorporate with that exact name so I can open a bank account in that exact name.  I had the conversation with the closer when I bought the second house and told her I couldn't do more business with them because when I called prior to the sale with the question, I was told they wouldn't do it.  The closer also thought the policy was asinine and asked me to write something up to see if she could get it approved.  (I haven't bothered yet.)

Since I typically make a new trust for each property it is not worth the hassle to get a tax ID or form a new corporation for each trust, especially when an existing corporation can be the beneficiary.

My solution to the problem was to find a title company that will actually follow the trust as written, rather than violating the trust and insisting on payment in a manner contrary to the trust instructions.  I found that title company by accident when I sold a property and they wouldn't make payment to me (personally), as instructed.  I had to wait for 4 days after closing to get them to change the payee on the check so I could deposit my own funds.  Since I always use the same title officer, he calls the same underwriter and/or corporate attorney for approval "just like last time" and it flies through with no further problem.  Luckily the approval was even entered into some electronic record which proved handy.  A recent sale went through without a problem even when that particular underwriter and/or corporate attorney was on vacation.  All the closer had to do was refer the supervisor, or VP to the correct place and there was never an issue.

As you can imagine I was more than a little ticked off so I altered the trust to address that problem for all future uses, since on the first occasion in 2015 I hadn't expected this problem.  My alterations were to give specific instructions as to how the payment was to be titled AND I added an amendment provision in the trust so I could do ANYTHING necessary to make the title company happy so I could get paid as needed if there was something else that could be done to make the underwriter happy.

To me the best answer to the question of why it is a problem is simply because most attorney's do not understand it.  What they don't understand they fear.  What they fear, they won't allow as they perceive it as a risk.  Title insurance is the business of avoiding risk, so they simply don't allow payment as instructed as they perceive it as a risk.

I strongly believe this title company is 100% in the wrong but my alternatives are to fight them legally or to find a title company that will do business with me in the way I need it to be done.  It is much easier to find the reasonable title company. 

Surprisingly this issue first came up about 11 (eleven) years AFTER I first began to use land trusts.  I had done many deals through multiple title companies and that issue had NEVER ever come up until last year.  You may have no issue at all, but it is best to ask questions in advance to avoid the problem.