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