What measures are in place if a borrower ceases to make their payments?
All investments are secured by real property. In the event of a borrower default, the lender retains the right to foreclose. Given that the loan-to-value (LTV) ratio is capped at 65%, the lender is protected by 35% equity in the property in such circumstances. For instance, if a property is valued at $1,000,000, the maximum loan amount would be $650,000. Should the borrower default, the lender would have $350,000 in protected equity upon taking over and potentially selling the property.
Are investors compensated if a borrower defaults on their payments?
Absolutely! Second Source Inc. shares half of its late fees with investors, resulting in a 2.5% increase in the borrower's payment to the investor. Additionally, if a borrower is 45 days late and a Notice of Default (NOD) has been recorded on the property, the investor will begin accruing default interest at an additional 5% (refer to the foreclosure process question below for more details).
How frequently do foreclosures occur?
Based on my experience with originating and selling hundreds of business purpose loans, approximately 10% of loans encounter some form of default. Typically, these defaults occur due to borrowers forgetting to make a payment or experiencing a temporary financial setback within their business. The vast majority of these borrowers resolve their issues by making a late payment, refinancing the loan, or selling the property. Of the entire portfolio, about 2% of loans proceed to a foreclosure sale. Of these, roughly half revert to the investors, while the other half sell at auction. These figures are derived from the data I have personally observed and the investments I have facilitated. It's important to note that these percentages may vary based on market fluctuations and overall economic conditions, and they should not be used for any detailed analysis or decision-making.
1. **Missed Payment**: If a borrower misses their payment, investors may file a Notice of Default (NOD) after a 45-day grace period. During this grace period, the loan servicer will contact the borrower and send late notices, while investors accrue a portion of the late fees.
2. **Filing NOD**: If the investors decide to file an NOD at the 45-day mark, the interest rate on the loan will increase by an additional 5%. The borrower is then given a three-month redemption period to reinstate the loan by paying all outstanding fees and default interest.
3. **Redemption Period**: If the borrower fails to reinstate the loan or pay it off entirely within this period, the property will be scheduled for sale by the loan trustee (usually the servicer).
4. **Sale Notice and Auction**: The sale notice is published, and the property is set for auction 21-25 days after publication. The starting price at auction will include the loan principal, all fees, accrued interest, and any amounts owed to the investors.
5. **Auction Outcome**: If the property sells at auction, the investors are paid off, and their lien is removed. If the property does not sell, it reverts to the investors through a trustee’s deed upon sale. As new owners, the investors would then need to recoup their investment by selling the property themselves.
This process ensures that investors have a structured method to recover their investment in the event of a borrower default.
What is the minimum investment, and how does fractionalized investing work?
The minimum investment for Trust Deed Investing typically varies but is often set at a level accessible to a wide range of investors. Fractionalized investing allows multiple investors to collectively fund a single loan, thereby lowering the individual investment requirement. For example, if a $1,000,000 loan is being funded, and the minimum investment is set at $100,000, ten investors could each contribute $100,000. This way, each investor owns a fraction of the loan and shares in the interest payments and any potential returns from the investment proportionally to their contribution. Fractionalized investing enables diversification and reduces the exposure of any single investor, making Trust Deed Investing more accessible and manageable.
Will you assist me if a foreclosure occurs?
Absolutely. We are committed to keeping all investors informed about the status of any loan they are invested in, particularly in the event of a default or an extension request. The goal of Second Source Inc. is to minimize the effort required from investors. Typically, no direct involvement is needed, and when action is required, it is usually a simple "YES" or "NO" vote conducted via email. This streamlined process ensures that investors can make informed decisions with minimal disruption.
Do you share fees with your investors?
Yes, investors share late fees and extension fees with Second Source Inc. Additionally, investors accrue an extra 5% interest when a Notice of Default (NOD) is recorded on the property.
To calculate your monthly payment, multiply your investment by the interest rate and divide by 12, then subtract $20 for the servicer’s disbursement fee. For example, with a $100,000 investment in a 12% interest rate loan, the calculation would be:
($100,000 * 0.12) / 12 = $1,000 - $20 = $980 net monthly payment.
This ensures you receive consistent and predictable returns on your investment.
Are there any costs associated with my investment?
There are minimal costs associated with your investment. Second Source Inc. does not receive any funds from investors directly. Our third-party servicer charges $20 per payment to the investor, retains half of all late fees, and charges trustee and recording fees if an NOD needs to be filed. Typically, any of these out-of-pocket costs for an investor are less than $1,000. All costs are added to their principal investment and accrue interest.
Can I invest through a Trust, IRA, etc.?
Yes, you can invest through a Trust, self-directed IRA, entity, or as an individual. Please contact us to get your investor account set up
PO Box 920471, Sylmar, CA
PO Box 920471, Sylmar, CA