Summary:

Investors in Trust Deeds may be single individuals, husbands, and wives as community property, Trustees on behalf of family trusts, family partnerships, limited liability companies (LLCs), or corporations (subject to documented authority) investing in the purchase of notes and deeds of trust secured by real property.

Real property loan transactions generate an expected monthly cash flow that is more significant than some alternative investments they may have considered.

The investor's decision to invest in a proposed loan transaction involves reviewing the material disclosure package, including the investment risks, and providing a written affirmation about their background, knowledge, and experience to ensure the contemplated transaction is suitable. Involved.

Article:

As agents, real estate/mortgage brokers shoulder a significant fiduciary duty to private party investors. This duty is not just a formality but a relationship in which one party places special trust, confidence, and reliance and is influenced by another who must act for the first party. The broker's role is to provide expert advice, recommend actions, and ensure all parties act in the best interest of the investment.

It's a weighty responsibility that should not be taken lightly.

A fiduciary duty binds California real estate brokers to facilitate property loan transactions with private-party investors. This duty requires the broker to disclose all material facts and investment risks, whether known or should have been known.  This includes facts discovered during the loan processing or underwriting. Understanding and upholding these fiduciary duties is crucial; the broker is responsible and committed to all parties involved. For instance, a material fact could be the property's condition securing the loan, and an investment risk could be the potential for the borrower to default.

Private-party investors in fractionalized or multi-lender loan transactions are also typically subject to mutual agency relationships. They owe fiduciary duties to each of the other investors within the structure of such transactions as required under applicable law.

If the total loan is $500,000, multiple fractional lenders of that transaction may be called fractional beneficiaries who will hold the title as undivided tenants-in-common.  Mr. and Mrs. Archie and Edith Bunker invested $100,000 or 20% of the loan transaction. Mr. and Mrs. Michael and Gloria Stivic, a family trust, invested $200,000 or 40% of the loan transaction.  Other individuals or lawfully authorized entities who will also own part of the loan transaction as tenants-in-common invested the remaining 40%. Other investors included Fred Sanford and George and Louise Jefferson.

Each fractional beneficiary owns a portion of the loan, evidenced by their names placed on the promissory note and deed of trust and recorded in public records. Multi-lender notes are evidence of indebtedness and are securities qualified by statutory exemption.  A statutory exemption is an exemption from the requirement to obtain a permit or register the offering under federal and/or state securities laws.

It's crucial to remember that a majority rule statute governs California multi-lender fractional beneficiary transactions or 2941.9 of the Civil Code.   Decisions may be necessary by the investor parties relating to the disposition of the loan and/or the property, such as:  Should we file a notice of default? ; Should the investors agree to a reasonable workout payment plan for a defaulted borrower and extend the loan period with the borrower to avoid triggering a formal default? ; Should we as investors instruct the servicing agent to have the property boarded up or spend $100,000 for a cosmetic fix-up to enhance a potential up-side profit on resale, or do we sell immediately at a distressed price and achieve a quick sale? These decisions carry potential risks, and investors must be cautious and vigilant to protect their investments.

Each fractional loan owner has a vote based upon a majority rule or 50.1% of the secured interest. The real estate/mortgage broker may have the sophistication to propose the best course of action for everyone concerned but needs help to decide.  Investors often vote for what they perceive is in their best interest.  (The brokers or an affiliate thereof cannot vote.  They can only recommend action.) This majority rule ensures that all investors are part of a fair decision-making process, empowering them to protect their interests and feel confident and in control of their investment. The broker provides expert advice and recommendations based on their knowledge and experience, but the final decision rests with the investors.

Let's examine a legal contract concept called the covenant of fair dealing. In contract law, there is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith and not destroy the right of another party or parties to receive their proportional benefits. In real estate investment, all parties involved, including brokers and investors, are expected to act in the investment's best interest and not take actions that would unfairly disadvantage other parties. This principle is crucial in maintaining a fair and transparent investment process, reassuring all parties that their interests are being protected.

Does anyone remember the Along Came Jones recorded in 1959 by the Coasters?

I plopped down in my easy chair and turned on Channel 2. An evil gunslinger named Salty Sam was chasin' poor Sweet Sue. He trapped her in the old sawmill and said, with an evil laugh, "If you don't give me the deed to your ranch, I will see all in half!"

I have worked with many Salty Sams, who possessed a selfish and contrary agenda from the best interest of the other investors. Even a few self-absorbed Salty Sam, Scroundel Investors must be dealt with. For example, Sam may perceive that if he holds out and disagrees with any action, all the other investors will get frustrated and sell their interest to Sam at a discount to avoid aggravation. This analogy describes investors who act in their self-interest, even if it means taking advantage of other investors. Sam is convinced that he can act as a predator for self-gain and get the keys to the ranch.

It is difficult for a mortgage broker who deals with private party investors to identify and reject those Salty Sam-type investors who are predators searching for the next opportunity. Yes, they exist. Salty Sam must know the mutual agency responsibilities of tenants-in-common relationships engaged in a joint venture enterprise for gain or profit holding interests (including mortgage loans) in real property.

Sam forgot that there is a majority rule mechanism and that the overlying body of law refers to the covenant of fair dealing.

Suppose the servicing mortgage broker followed all the requirements of 2941.9 of the civil code, and Salty Sam refused to comply with the majority's vote. In that case, the servicing broker, responsible for managing the loan on behalf of all the investors, may file a superior court action called a motion to compel Sam. One instance I recall is when a Sam-styled predator investor lost and was ordered by the court to adhere to the majority rule and ordered by the judge to pay $35,000 in attorney's fees and court-related expenses.  The court ordered compliance with 2941.9 of the civil code and that the hold-out investor pay $35,000 out of his capital investment. Hallelujah, jerks, referred to here as Salty Sams, do not always win.