Is this loan safe to make? - Posted by CharC

Posted by BankRobber on May 05, 1999 at 21:10:53:

The whole TPA/IRA topic gives me a headache. I just know that I was defrauded out of a few bucks by one once. And I know of others that were defrauded out of their life savings.

Is this loan safe to make? - Posted by CharC

Posted by CharC on May 04, 1999 at 20:39:33:

I have been approached to make a loan to two investors who have fair to poor credit. The collateral will be well located residential acreage in an area seeing a lot of development. (Part of this original tract has be subdivided and is being developed into apartments.) The investors have a lot of experience marketing land of this type and have done most, if not all of the work to get the necessary zoning approved to make the property saleable to developers. There is water and sewer to the property and good road frontage. The investors’ financial difficulties are related to other investments that have not done well.

They are requesting approximately $125,000 and are willing to pay 16.0% interest and 5 points. They would like no payments during the term of the loan (1 year) with the principal and accrued interest payable in 1 year. We are certain the property is worth at least $500,000 and may be worth up to $800,000. There will be a second behind my first for several hundred thousand dollars which is security for seller carried second from the original sale. I’m told that this seller has agreed to subordinate to second position.

I have a small amount of knowledge (basically a newbie) but have a knowledgeable real estate and mortgage person to help me with the due diligence, note, mortgage, environmental studies, etc.

I’ve never done anything like this before and I’m apprehensive. It looks safe to me on the surface and the interest rate is tempting (I’m going to use IRA funds that have been earning much less and use a TPA) but it seems too good to be true that I can get this amount of interest.

What am I overlooking or does this make sense to do if the the due diligence pans out. Assuming the information I am providing is accurate, is there anyway I can lose my money? I am told this is called a “hard money” loan. Are these legal? What does “hard money” mean?

Thank you for the help.

Re: Is this loan safe to make? - Posted by Ben

Posted by Ben on May 05, 1999 at 06:06:12:

I am no expert but I would make sure that the building and zoning approvals are airtight. This is the one area that could blow up in your face,leaving you with
worthless land. Have you also gotten an independent
appraisal? You say the borrowers have been in trouble because of past bad deals. I would like to know what happened there and what is different about this deal?
Be careful, particularly with your retirement funds.

Re: Is this loan safe to make? - Posted by Roy

Posted by Roy on May 05, 1999 at 05:35:46:

Talk to your attorney about this before geting envolved

Re: Is this loan safe to make? - Posted by BankRobber

Posted by BankRobber on May 04, 1999 at 22:34:23:

yes it is legal. There is probably a greater chance that your TPA will defraud you, than there is of you losing money on this investment. Be sure to get Title Insurance (including protection against mechanic’s liens).

Fraud by TPA? - Posted by CharC

Posted by CharC on May 05, 1999 at 05:26:34:

Thanks for the reply.

Being new to all this, I’m not sure whether your comment about there being a greater chance the TPA will defraud me was meant to be taken literally (that is, you feel there is a problem with TPA’s in general or certain TPA’s in particular) or whether it was your way of underscoring just how safe you feel this loan is (that is, since you feel it is unimaginable that a TPA would defraud anyone, it is also, therefore, unimaginable that I could lose on this loan).

Could you please set me straight on this? Aren’t TPA’s like Security Trust and Mid-Ohio Securities above reproach or are there dangers with using companies like these?