Real Estate Collateral Transfer Of Note And Lien Conversation
This was an interview with my real estate attorney where we discuss the Real Estate Collateral Transfer Of Note And Lien structure. Along with some other discussions about private mortgage lending, aka, private money and various real estate topics within the capital sphere of the investing spectrum.
Brant: This is Steve Newsom, Attorney at Law. We’ve been working together almost since I first got into real estate. You set up, not my first entity, but all the other since. Whenever Jack and I started raising private money, you’re who we called and sit down with you, pretty much like, “What can we do and not without getting thrown in jail?” “Do this, do, this, don’t do this.” Which is pretty much, “Just be honest with people. Don’t go doing all this public marketing, all that kind of stuff.”
Brant: So why is Steve here? So recently I’ve been lending more. Okay? So sometimes when I lend I use my own cash, but more frequently when I do lending I use my private lender’s cash. Okay? Why is this really important? Probably everybody in here I’m assuming is focused on real estate investing is trying to raise private money. Am I right? Hopefully so because that’s critical fundamental to your business. So the last thing that you want to do is raise money and get a private lender relationship and then you lose them.
Brant: What is that noise?
Speaker 2: The AC.
Brant: Did it kick in or something? So last thing you want to do is raise money, you get a good private lender relationship and then they leave because you don’t keep them busy enough for whatever reason. So a few years ago we started really creating that situation where we had more money available than we can use. Well, so what did we start doing? You spend all this time cultivating relationships with lenders and your lenders, they trust you. I have certain lenders they only want to loan to me. That’s great and it’s fine, but there’s a line. So it’s not good for them for the returns because the last thing you want, if you’re trying to invest money, it’s just have it sitting for months and months and months at a time.
Brant: So years ago I started loaning it out, basically brokering it kind of, to my students. Handshake agreements are great, right? I was like, “Hey man, this is my lender. This is my lender. I’m letting you use them now, but they’re mine.” People are people. People go around, dah, dah, dah, dah, dah and stuff happens. So I started going to my lenders, I was like, “Hey, this is my bar.” Pretty much I’m like, “I’ve been the middle man and I’m being compensated for it, I understand that. But I appreciate if you come to me first.” Most of them have, it happened just last month. They’re like, “Hey this students coming to me so I had to call them. I’m like what’s up man?” It was pretty much like a, “Oh see what had happened was I thought you meant the other lender, not this one.” I was like, “All right man, just don’t do it again. We’re still good, but don’t do it again.”
Brant: So I called Steve and this is … Y’all need to write Steve’s information down because this is what I’ll do a lot of times. I’m like, “Steve, I want to do this. How can we do it?” That’s a really good way to phrase a question because some attorneys will tell you, “You can’t do that.” But Steve will take the time like, “Well let’s think about that and see how it’s possible to do it.” Occasionally you may say, “No, you can’t do it.” But you’re usually really good about [crosstalk 00:03:33]-
Steve: What’s a great thing about real estate and real estate funding and real estate investing is you can be really creative, just take the time to think outside the box a little bit. I haven’t been a lawyer my whole life, I actually was in the business world, I was an engineer, I had a consulting business. So I tend to think outside the box because if my background a lot. So Brant would come to me and he’d have some weird situations and say, “What can we do?”
Steve: So we sit down and we’d think about different ways of doing it. I’ve been a real estate investor too, and I’ve had to be creative when I was investing in real estate. So I know where he’s coming from. So we come up with a plan and usually we can come up with some way to do it even though it’s a little unconventional, but it works.
Brant: Yeah. So as we progress as real estate investors, I told Steve, I called him up with my problem. I was like, and he knows that I was working my lenders. I was like, “Hey one of my students or old friends, should say, went around again, it’s frustrating.” He mentioned, he’s like, “Why don’t you use this collateral transfer of a note structure?” So I was like, “Well tell me about that.”
Brant: He’s like, “Well this is basically what a lot of hard money lenders do and big lenders.”
Steve: Basically what it is is, and I’m going to try and do an analogy to make it simpler to understand, okay? But what you’re doing is Brant is going to loan money to me to go buy a house, right? Private money loan, just straight regular deal. Okay? But then he’s going to have Joe, who’s going to loan him the money to loan to me. Okay.? But what’s Joe’s problem? Joe’s problem is, well, what if he doesn’t pay you? What can I do? I don’t have a lien on the house so I can’t foreclose on the house. So what you do is that Brant takes the note that he has for me and he says to Joe, he says, “Joe, if I don’t pay you, then you can foreclose on the note with Steve.”
Steve: So then Joe becomes the owner of the note and therefore he secured on the property, because the note’s secured on the property. So it’s like an indirect way of a lender being secured on the property. It’s just that Brant’s in between the note. So that’s the securities. Security’s not directly in the property, the security is the note that is secured on the property. Okay? So it’s not really that complicated and it allows the lender to have security because what we do is we draft up documents. So some of the documents for example, is there’s going to be a loan agreement. Okay? The loan agreement with Joe is the same thing as the note between Brant and me. Okay? Then you have a deed of trust, right? Okay, the deed of trust secures the note the Brant gave me or that I gave the Brant on the property, that’s the deed of trust.
Steve: Well there’s a document called a collateral transfer of note and lien. That’s the same thing as a deed of trust only instead of on the piece of property, it’s on the note. So it’s the same type of transaction. Again, it’s just that you don’t have the lender … Joe doesn’t have a direct lien on the property, it’s an indirect one because then he would have to take the note, step into Brant’s shoes and then Joe would collect the payments. If the payments aren’t made from the homeowner or me, then he could foreclose on the property because he now owns the note. So you see how that works? So conceptually, it’s pretty simple, it’s just there’s one extra person in the middle.
Steve: So what happens with a lot of hard money lenders in a lot of big deals, this happens big companies and stuff, is that it keeps the money working. Okay? So that’s why a lot of them do it. It provides Brant, or the person that’s trying to put the money to work, with more money because then there’s people that are willing to do that. So anyway, what we’ve done is we’ve taken this concept that usually is done on big banks and things like that and we brought it down to the single family home transactions. So that’s how we came about. Does that make sense?
Brant: So just real simple, typically a lender loans money to a bar, right? This is our structure. So here’s what we’re doing, this is another benefit of it for our lenders and then for you guys is essentially the entrepreneur. Like I said, some of my lenders I’ve been working with for 10, 11 years. So for me, whenever I started essentially helping them to loan to other people, a lot of them really didn’t like it at first. Some of them still don’t. They’re like, “Well we want to loan to you Brant, we want to loan to Invest Home Pro.” Because they know me, they’re comfortable with that. So I was spending a lot of time going to bat for the borrowers. I vet my borrowers good and I have 100% track record, but it’s still, it’s a lot of time and effort and, “Hey they’re a good person, they’re going to pay I hope.” But I’m still, I don’t know if they are, but I’m assuming that they are and it’s a good deal.
Brant: So I’ve done my best to only do loans on deals that I would personally take back if it came to that. So what this has done is essentially now my lender, for them, instead of dealing with just some random person that they don’t know now the borrower is my company, Invest Home Pro. So when they’re lending, they’re lending to me. They may or may not even know who the borrower is it all. So what am I doing? So that lender is going to entrust me with this money, Steve’s going to secure it, right? Like what the paperwork is going to secure it. So then he is here now, which is Invest Home Pro and so that I’m going to have a separate set of loan documents and I’m going to loan to the borrower. Okay?
Brant: So I’m going to go to this borrower. So this borrower’s responsible to me. They’re making payments, I’m making payments to this person. Okay? Now if this person doesn’t perform, if they default, if there’s a hurricane or whatever, then who’s responsible for paying them? Still me. So I didn’t like, when I was coordinating this thinking myself, did this person pay? I had that happen, “Hey so and so’s late.” Now I’m the middle man and I don’t have any control and I didn’t like that. So now I know with our systems, if we’ve received that check or not, our stuff always gets set up on auto bill pay to our lenders, and I encourage all you guys to do that. Pay your lenders early. So I know that I’m paying them no matter what.
Brant: If this deal goes bad, if this deal goes sideways, if they don’t perform, guess what? They’re never going to know about it. They asked me, but I’m just going to pay them and I’m going to handle this. So it gives more peace of mind for me, more peace of mind for them. It unclutters the whole process. Then I’m able to deploy more of my private lender’s money to keep it working so I keep them happy with me and it’s an income for me. My lenders know, let’s say if I have a lender that says, “Hey Brant, I want 10% at one point.” Well I’m going to charge 12% in two points or three points. Or depending on the deal, depending on who it is, I may church three or four points. If it’s someone I don’t know, if there’s more risk, it just depends.
Brant: So that’s what we’re doing, doing it with this structure.
Steve: There are some advantages to the lenders loaning to Brant and you just mentioned some of them. But they have more security. Because if you think about it, that lender now has two people on the hook to pay them, right? They’ve got Brant who’s on the hook to pay them. If anything goes wrong and they don’t get paid, Brant’s company is liable to them. Okay? Then they’ve also got the borrower on the property because if they take the note, then they get the borrower, the borrower has to pay them. So they actually have two people that are now liable to pay that note. Okay? So they would have to have two people default in order for them to get in trouble. Then if both people default, then they get a property through a foreclosure.
Steve: So they actually have more security doing it this way because there’s more people liable to pay.
Brant: So just want to share that with you guys, if you’re raising money and you guys to go become lenders, but if you start raising it at a higher capacity, higher level then it’s just something to think about.
Steve: This isn’t something we just made up. Okay? This has been around, I’ve just brought it down to a smaller level to where we’re doing it on smaller people, on single single family instead of just being done on hotels and stuff like that. Okay? So it’s not something we just concocted. This is a thing that’s been around for a while. It just hasn’t been at the small investor level very much and now we’re doing it that way.
Brant: Okay. A couple of questions.
Speaker 4: So it’s essentially a wrap?
Brant: No, it’s not a wrap. It’s two totally separate loans. Not a wrap at all.
Speaker 5: What did you call it again? Collateral?
Steve: Collateral transfer of note and lien.
Brant: Okay, was there another question?
Speaker 5: Have you had a borrower default?
Brant: I’ve never had a borrower default. I’ve had somebody [crosstalk 00:13:39].
Speaker 5: What’s you plans for if that does happen?
Brant: I’ll take over the loan. So I’m dealing with close to 300 deals. Right? So I’ve always performed on every single one of my deals. There were times when I was first starting out and I got stuck in situations that were very, very difficult. But going back to when I first got in this business, when I first started raising private money, I remember I had some lenders and they’re like, “We like you Brant, we want to invest with you.” I’m going home and telling my wife about it and she’s like, “Man, that’s awesome.” But I felt this enormous amount of pressure on my shoulders because it’s a big responsibility. I told my wife, I was like, “I’m nervous because they’re putting their hard earned retirement money, their wealth, everything that they have and trusting me with it.” I said, “If anything goes wrong, babe, I’m like, we’ll sell our house. We’ll sell our car. I’m going to make it happen.”
Brant: So I hope the borrower never defaults and I’ve never had one even over in finance. But whenever it happens, I’ll take care of that situation. Another part to that question, this is really, really, really important for me. I’m only lending on deals that I would personally invest in. The properties I mentioned earlier … Well, there’s some exceptions. But for the most part, what we’re lending on is our cookie cutter suburbs homes, loans that are less than $200,000. We can rent them, flip them, owner finance them wholesale them. So I give myself exit strategies. We are controlling the draws, we’re dispersing those accordingly. So we’re protecting ourselves.
Speaker 6: So we can just pick up-