Pledging note - Posted by Alex Bravo

Posted by David Butler on August 08, 2007 at 10:03:14:

Hello Alex,

Hey… I appreciate your private email, and your response here as well. But there are some things that are talked about frequently here that cover a lot of ground - ground that can’t be replicated in a quick response that adequately covers all the bases. And there’s nothing asked, nor answered, that goes to complicated analysis, or full-blown asset protection or estate planning, to make a simple deal. But as the Einstein presciently observed - “Make everything as simple as possible, but not simpler.”

Here, you are asking a very, very basic question, and one that implies that much more basic knowledge is needed by both the prospective lender, and yourself.

But let’s cover some of the ground here. John Behle offered one of the immediate solutions that came to mind, with regard to the “window-dressing” of putting insurance behind the deal. That is particularly effective with skittish investors, and or very marginal deals. BTW… when I read your private email last night, one of the immediate thoughts that came to mind for furthering your education in regard to working with private investors - was an excellent article (written by John Behle) that I read here some nine years ago about forming those relationships with private investors, and things to be aware of. And I did cover a lot of ground in that respect in the course you mentioned, in several chapters… including the one titled “Investor Relations”. But spend some time here looking up as many of John’s discussions that include the word “investors” and you should come up with some real nuggets for future planning and consideration.

In the meantime, John also mentioned the obvious. You are pledging the note, in return for the money. What happens if you are unable to pay the note, for whatever reason??? Typically, in standarized UCC model security agreement form, the investor takes over the note in satisfaction - or partial satisfaction of the loan (again… what do the parties agree will happen?). That’s what the pledge is all about in the first place, right? Collateral for the loan. This is the essence of “hypothecation”, which many of us routinely do in order to obtain more capital to purchase more notes.

And if the Payor on the note fails to pay… assuming the MH securing the note is properly filed with Nevada’s Division of Manufactured Housing to achieve lien perfection, the holder would follow through with foreclosure. Then, he might decide to sell the MH unit to recoup all, or at least part, of his loan balance. *Note - he would need to hire a real estate agent who specializes in MH sales to sell the home and recapture as much of his loan as possible. In Nevada, owners of manufactured homes in parks can only sell their own homes IF it is the seller’s primary residence. Investors, and lenders-in-possession must hire licensed agents to sell the properties otherwise).

BTW… rather than using insurance, the primary thing I do is include a bailment provision in the hypothecation agreements I use, putting the note into custody of a neutral third party holder (Note Servicing Center in northern California, who keeps it in a fire safe), per the governing instructions from both parties. I also have NSC service the notes I have “pledged” to the private investor groups who have funded the lines of capital I use.

This has worked very well for me for the past seven years, and provides a great deal of protection to the lender.

BTW, if you would like, send me an email and I’ll refer you to the escrow company I use over in Las Vegas on my Nevada note purchases. She can assist in the paperwork and escrowing that can help you do an “arms-length” transaction.

Hope that helps… and

Have Fun For A Living

David P. Butler
www.hotspurinvestments.com

Pledging note - Posted by Alex Bravo

Posted by Alex Bravo on August 06, 2007 at 10:57:26:

I want to borrow money from a private investor by pledging my note secured by a mobile home only.
His question is what happens to his money if I die or something bad happens to me before paying him off.
How should I address this issue?

Re: Pledging note - Posted by John Behle

Posted by John Behle on August 07, 2007 at 18:53:20:

What would likely make him most secure would be a term life insurance policy. It would not cost much, but would bring him a great deal of security. You could also look into insurance in case of disability that would also pay off the note. As far as other issues besides death, he is secured by the mobile home, so that would always be the ultimate resource. A bankruptcy or other financial circumstances could affect him. You could circumvent that by forming a corp. or other entity that is liable on the note instead of you.

Re: Pledging note - Posted by David Butler

Posted by David Butler on August 07, 2007 at 16:22:38:

Hello Alex,

It sounds like neither the investor, nor you, should be attempting a deal like this - if neither of you knows the basic answer here. You both are setting yourself up for legal troubles. In all honesty… the best answer here - for both of you - truly is “What DOES happen to his money if you die, or something bad happens to you before paying him off”.

I’ll offer this as a starting point - “What do the TWO OF YOU agree will happen in such an event(s).”

By the way, if he is a novice investor, and not a licensed lender - I strongly suggest you at least consult with an attorney knowledgeable in contract law, and lending law, in the state where both you, and your private lender live. You really don’t want to risk the various problems you may be creating for yourself otherwise.

Best wishes for your success, and…

Have Fun For A Living!

David P. Butler
www.hotspurinvestmentgroup.com

Those are great ideas. - Posted by Alex Bravo

Posted by Alex Bravo on August 07, 2007 at 22:12:49:

Does anybody use personal property trusts instead of Corps or LLCs? It seems like trust is a good way to reduce overhead.

Would it be advisable to make both me and him as co-trustees?

Thank you David for your answer, but… - Posted by Alex Bravo

Posted by Alex Bravo on August 07, 2007 at 18:34:21:

I spent two weeks trying to find an attorney that is knowledgable in lending here in Nevada.
What I found was all attorneys that know more about lending work with banks and mortgage companies.
I’m too small for them as a client.

They seem to be really busy also, I wonder why? :slight_smile:

Finding an attorney that is kind of knowledeable in contracts is much simpler, but they are not of much help.

Just to make it easier for you guys to really answer my question I would like to say that I completely understand that none of you guys are attorneys and you don’t practice law, and those how are and do, do not give legal advice here.

What I’m looking for is some practical ideas as to what possible answers might be to that question “What DOES happen to his money if you die, or something bad happens to you before paying him off”.

Actually I’m looking for what is pactical, as far as cost is concerned. We probably don’t want to go into full-fledged asset protection and estate planning here.

Note is for $37k and investor is my best friend who will agree to what is reasonable.

I didn’t want to mention my relationship with the investor because I wanted to treat it as if he’s a stranger.

Please refer me to where I can read about this issues.
To give you a better idea about my level of knowlwdge, I can say that I’ve read literally thousands of posts here, including your “Tin Can Alley”, David. Is there an answer there? It’s a big manual.

Alex