Below is a continuation of examining case studies while identifying the problems and solutions to complete loan transactions. The funding broker/lender has relationships with individual investors who wish to invest their capital into trust deed investments. They will become beneficiaries on the recorded deed of trust. Below are examples 9 and 10:
- The borrower’s mortgage broker informs the funding broker/lender:
“I have a client who is a dentist and provides dental services for low cost and credit-based customers. He operates his dental practice as an S-corporation. His practice is run out of a building which he owns in a revocable family trust. Can he get a loan?”
The funding broker/lender responds:
“Yes, however the underwriting procedure is different. As far as an appraisal of the property the appraiser will determine whether the rent, he is paying from his one entity to his other entity is a true economic or market rent. The valuation would rely on comparable commercial rents in the geographic area rather than what he is paying himself. The appraisal will determine whether he is paying above, at, or below market rents. Part of the appraisal process is a rent survey. Since his S-corporation is a pass-through entity, all profits will pass through to his personal tax returns. As a result, we may underwrite the ability to pay by reviewing the income from both borrower and his S-corporation. Lastly, the business entity would have to sign a subordination agreement to ensure that it is junior to the recorded deed of trust. If the lender were to foreclose on the property ownership entity, meaning the family trust, the lender would not want to keep the S. corporation tenancy of a related defaulted party.”
- The borrower’s mortgage broker says to the funding broker/lender:
“My client is elderly and has a family trust with substantial assets: He used to be the beneficiary trustor, trustee and the beneficiary. He has transferred the capacity and responsibility of a trustee to both his sons as co-trustees, who are also beneficiaries of the trust. He would like to borrow money to fix up a rental home.”
The funding broker/lender responds:
“We need to review the trust agreement and any amendments to determine who has the authority to sign and encumber the property. Also, we will need substantial documentation that this is a business purpose loan, rather than a consumer purpose loan. Upon a review of the file, we may also request that the borrower’s attorney submit a letter that they have reviewed the transaction, and that all parties agree that the transaction is for business purposes and beneficial to the trust.”
Mortgage brokers on both sides of the transaction are licensed professionals. The borrower’s broker works on behalf of the borrower to get the required information, verify facts, and overcome obstacles. Full disclosure is assumed, not hidden and treated as an avoidance game.
Understanding complex underwriting issues can make or break a transaction. Make sure you work with knowledgeable mortgage brokers to assist you through the process. In most cases, you may need to engage the services of a third-party specialist such as attorneys, accountants, appraisers, property inspectors, environmental engineers, escrows holders, and title insurers. Real estate brokers active in the community in which the security property is located may be helpful.
The examples presented provide limited information for readability. Each transaction comes with a more complex set of facts that may alter the outcome of a transaction.
Business and Private Money Finance Consultant
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This article is intended for educational purposes only and is not a solicitation.