Not sure if the smart financial folks are still around (I see windy is).
Looking at investing in Trust Deeds, and wondered what others thought. Specifically Ignite funding where you can buy in on part of the Trust Deed. Buy in as low as $10k 10% return.
(no not part of Ignite bank that just had the lawsuits)
Huh. Never heard of them. Seems to be a Western thing. Iāll be interested in the responses you get. Iām particularly curious regarding:
why the carefully vetted borrowers they facilitate your lending to canāt borrow at <10%; and
who your collateral agent is if youāre one of dozens of names on a deed.
Not being dismissive but this seems a funky model.
EDIT, I had a look at whatās available and I have more questions. They only have two properties available right now - Iāve pasted the first below. Is it me or does this read as a $12m loan to refi 180,000 sf, collateralized by Unit 3,without ever saying that Unit 3 = that same 180,000 sf?
First Trust Deed collateralized by one unit (Unit 3) within the Marketplace 205 shopping center in Portland, OR. The borrower recently acquired this property as part of a greater purchase to acquire roughly 315,000 sf within the Marketplace 205 shopping center and has since stabilized nearly 135,000 sf of that original purchase. Now, the borrower is looking to refinance the remaining 180,000 sf while they work to bring in new tenants to further stabilize the property. There are currently 6 suites that make up Unit 3, and two of these suites already have signed 10-year leases in place with strong tenants. One more suite has an LOI in place, and the remaining 3 suites make up approximately 31% of the total footprint. Located near the intersection of I-84 and I-205 within Portlandās Gateway District, the property is surrounded by high density residential, and the area has an additional 700 multifamily units currently in development which bodes well for the long-term viability of this project.
Master Loan Amount: $12,000,000
Yield: 10% interest is paid monthly in arrears with payments due on the 1st of each month with a 10-day grace period. *For investments equal to or greater than $100,000 investors will earn 10.5%.
Term: Nine months with an optional extension at maturity. Final maturity date is 7/28/26.
Yeah the properties online show limited info, if you sign up, you get a lot more info (tipshit) about the loan, guarantees the company taking out the loan. Also the ones that stick around and make it to the web page are the lessor desirable ones. When they sign up a loan, they text out the info an you can reply via text your in. Many fill up in a day or 2.
The vetting is required by the State licensing agency. I viewed it as typical America Nanny state.
One of the things that makes Ignite unique in this space, is they do all parts. So if the loan falls into default they act as the collecting agency, they do not sell it to a collection firm. They have a bunch of videoās on Youtube of what they do. and had a webinar at the beginning of January with a q&A. Then have been around for a while. A friend who uses them told me about it. His first one went into default since then he has done more than 10 than have paid out fine.
OK, thatās a lot answered. Iām not a RE lawyer, much less one in any of the states they seem to operate in, but Iām not clear why individual lenders on the deed if Ignite are empowered to act as agent on enforcement. My interest is piqued though.
Sorry to follow up, I clicked on windy hidden response and am not sure itās that helpful as most of those questions are answered. The big one for me remains: what is ignites position and what duties they owe you when acting as collection agent. If you canāt do due diligence, a decent shortcut is ensuring alignment of interests. If ignite have zero financial skin in any particular deal and their relationships are with the developers who need this type of financing, it seems like that alignment is really missing.
For me to even start investment due diligence, those Qs are not answered adequately. Anytime someone offers non-traditional financing ādealsā that offer above market ROR, cloaked in lots of words and structural complexity, and do not answer the āWhyā Qs like Windy took the time and effort to list ā¦ I pass.
But there are those here who know the financial world better than I and may know of pittfalls or other blind spots I have.
The friend who invests in these is also fairly conservative, and smart in the financial area which also gives me more assurances. He was turned on to Trust Deeds by another associate who has been investing in them for decades, but can afford to buy the whole lot.
Right, thatās a very different scenario. If youāre first lien on a piece of property, confident in your ability to assess its value and have the number of a competent RE attorney to handle enforcement your investment might actually be quite simple.
So many questions with this fractional ownership model though. I kind of want you to sign-up so you can share what they say about them . If youāre one of 1,200 note holders and the property goes into default do Ignite automatically enforce and sell? Any course of action that required independent judgment from them - including moving straight to sale - is incredibly risky for them and unless thereās some sort of voting agreement I donāt see how they could take a Req. Lender vote on the appropriate course of action either. Who pays their costs on enforcement? How do they make money generally? If we assume they charge a closing fee of [1]% to the borrower what happens if that borrower has 3 more deals in the pipeline and asks Ignite to forbear for a few months (during which time the value of the property might plummet)?
Iāve been nothing but a worrywart on this but my questions come from genuine curiosity.
Iām out of my depth here, but my question would be- if this is such a great investment, why donāt they go to a bank for financing at closer to prime, and keep the difference, rather than pay you 10%.
They got back pretty quicklyā¦
I think I did pretty well.
Why are they paying 10%?
Speed and Flexibility. Ignite Funding is capable of raising funds in a short amount of time to finance a variety of real estate projects. As a licensed mortgage broker regulated by the Mortgage Lending Division of the State of Nevada, Ignite Funding has more flexibility in its loan selection process than traditional banking institutions. With the majority of loans being underwritten for 6 to 24 month terms, Borrowers are willing to pay higher rates of interest for short borrowing periods in order to obtain needed financing to acquire or develop real estate projects immediately.
Why is the minimum 10k?
The minimum of 10k is mostly a business decision, similar investment models generally require a minimum investment of $50k or more. Because we are regulated by the Mortgage Lending Division of the State of Nevada, the suitability requirements for investors are lower ā meaning that you do not need to be an accredited investor, and as such we wanted to make our investments available to a wider audience of investors.
If this was such easy money why isnāt everyone doing it?
There are a lot of ways I could answer this, and a few different perspectives that I think are important:
Investor Perspective: Why isnāt everyone investing with us ā We have thousands of individual investors with a 90-95% reinvestment rate, because we are regulated as a Mortgage Lender there are strict guidelines that limit how we can advertise. Even though our investment minimum is considered low compared to similar investments, it can be higher than many people are comfortable with or able to invest. Also, the suitability requirements to be able to invest with us, unfortunately do disqualify a number of people who would otherwise be investors.
Business Perspective: There are a lot of people who use Trust Deeds as an investment model ā either as individuals, or as a fractionalized investment. The individuals tend to be self-sufficient, are able to evaluate the risks, have a long history within the real estate industry, and tend to stick with a single asset class, but are limited by the amount of capital they can deploy on a deal. As for other businesses that have deployed a similar model, there have been a wide number of issues ā one of the more important ones in my opinion is that many of these other businesses DO NOT put the investors names on the Deed of Trust, which means that as an investor you do not have ālegalā claim to the property in the even of a default and the business can sell the asset for their own game (Ignite Funding puts your name on the Deed of Trust), additionally there were numerous VC backed companies that started up in our space that have since failed, gone bankrupt, or even been involved in lawsuits, and the best guess as to why is that they outsourced to many of the crucial elements that exposed them to risk in default scenarios (more on this here: Will Online Crowdfunding Platforms Endure a Real Estate Market Correction?) Whereas Ignite Funding is full service, A-Z ā we do everything from origination, underwriting, and reconciliation in the event of a default.
Why is vertical integration good? Conflict of interest?
Iām not sure exactly what you mean by Vertical Integration in this case, could you expand on this for me?
Why structure it the way it is?
The structure is intended to solve the needs of every party with the #1 priority being protecting the investors principal. Borrowers come to Ignite to for funding to complete their construction projects, they choose us for one of several reasons: typically either speed of funding or because their loan amount is too big for small banks and too small for big banks. Once weāve properly evaluated the borrower, the risk, market conditions, and have approved the project with the borrower agreeing to the terms, we then open the project up for investors. They will then have all the pertinent details including their fixed yield, term of project length, collateral, borrower history, and additional information. This allows the investor to act as the bank, with Ignite Funding acting as the manager and middleman, and most importantly, owning the reconciliation process if needed.
What exactly are you purchasing?
The simplest answer is debt. You are acting as the bank making a loan to the developer, if the developer fails to make payments then you become the owner of the property (collateral) and Ignite Funding will work on your behalf to have the property sold in order to recoup your principal and back-due interest.
Whatās your priority?
Our priority is always the investors.
Whatās securing your investment?
The Deed of Trust. This gives us the legal right to take ownership of the property in the event of a default.
Whatās the valuation of the collateral?
Each project will have a 3rd party valuation (either and appraisal or BPO (Brokerās Price Opinion)). Both valuation models are valuable, but there is a good argument that the BPO is stronger, while an appraiser is looking at what similar assets sold for within a restricted radius, the BPO is considering what they would be able to sell the specific project for today. This figure is represented as LTV or Loan-to-Value. This is represented as a percentage that indicates the value of the property compared to the total amount of the loan: for instance ā a property worth $100 with a loan of $50 would have a 50% LTV.
Who values it?
See above
Who are the borrowers?
Borrowers are commercial developers; we require them to have at least 10 years of experience with the asset class that they are developing. In other words, if a home developer for 20 years now wants to develop a restaurant, we will not fund them because while they have extensive experience with homebuilding, building a restaurant is a different task that they do not have adequate experience with.
Why are they borrowing?
The borrowers are taking out these loans for either: acquisition, horizontal development, or vertical construction (most projects will be a combination) in any of these phases of development ācashā and āspeedā are crucial. Because these loans are generally not for finished properties that are generating monthly cash flow (some are, but not most) most banks are not setup or willing to evaluate or manage that type of risk ā whereas with an existing property with tenants they are more established to evaluate. At Ignite Funding we put special emphasis on the borrowers exit strategy ā how they will repay their loans. A common exit strategy is that the borrower will be selling the property, obtaining bank financing, or permanent debt after the construction of the project is finished. At that point the large commercial banks are more likely to fund their completed project. The most common exit strategies I see are to pay off our loan with either the sale or refinancing of the property once completed. These loans are mostly setup up as ballon loans, so the borrower is only paying interest until the end of the loan when they must pay it off in full. This works well for them because it allows them early access to a large amount of capital while only having to pay the interest, until the end of the loan when they can pay off the full balance with the proceeds from either the sale of the property or the new, long-term loan from the bank.
I think thatās answered below, they actually are paying more than 10%, cause they have the origination fees, and servicing feeās which is where ignite makes there money.
My understanding, is these short term 9 month loans are not of much interest to banks, and from a quick google these types of construction loans run the 8 - 15% range.
Investopedia has a page explaining trust deeds, and how they differ from a mortgage. One is that the trustee is able to foreclose and recover from loan defaults a lot faster.
I think when windy asked āwhatās your priority?ā he meant in the projects capital stack, though I think they answer that elsewhere by saying they typically/only do first lien (which is good).
If you want to go another round with them, the distillation of my concerns would be:
who makes enforcement decisions if an investment goes into default?
do investors have a voice in decision making in that context and if so how is it expressed? What if thereās a diversity of views?
Well I can relate a story they told of a project a year back that was a construction project in Utah, and they defaulted. Ignite took it to the deed holders, and said we have 2 choices, invest more capitol and finish the build and recoupe through selling the finished projects, but it will take more time, or fire sale and you probably wont get all that was invested back. In the end, Ignite actually invested the capital themselves finished the build out, and sold and paid off the deed owners, in full.
Your question is more about the dynamics of how Trust Deeds work. Its a trust with a trustee, in this case, Ignite, and the investors are the owners/beneficiaries of the Trust, the asset is the Deed of the land. So when any Trust deed goes into default, its a working relationship between the Trustee and the owners. Made a bit more complex as there are a lot of owners.
Not sure what you mean by who pays enforcement.
If the property is sold off, I would expect the cost of the sale comes off the proceeds of the sale, and the money thatās left is paid out to the deed owners. Not sure how else it would be done.