First Trust Deed Investing with Mzima Property Solutions

What is First Trust Deed Lending?

What’s in it for you.?

Banks take in money on CD’s. They then loan the money out at a higher rate of interest to other people to buy houses. Hard Money Lenders, Private Lending Brokers and aggregators offer investors higher rates of return, but may also take up to 10% off the top for themselves increasing our cost and decreasing your return.

We prefer to cut out the middle men. We buy and sell houses. To buy houses, we prefer to borrow money from private individuals. The loan term is generally 12 months, although typically we will try to sell the property and close out the loan in 6 months or less. Therefore, we insist that there is no prepayment penalty for the loan. For a First Trust Deed Loan we will also pay points to the lender at the close of the loan.

This is how it works:

  1. We locate a property we want to buy.
  2. We borrow from you to purchase the property.
  3. We have a formal closing and you get a mortgage on the home with other important documents.
  4. We rehabilitate the property.
  5. We sell the property.
  6. We pay off the loan with the proceeds of the sale.

We specialize in finding distressed properties that need to be renovated. We create value by changing those properties from dangerous eye sores to move in ready houses, ready for a quick sale to home buyers looking for a new home, thus increasing the value of surrounding homes and neighborhoods.

Once a property is located, we prepare an investor package that includes a detailed list of work required to renovate the house, along with a cost estimate for those renovations, which is provided by our General Contractor. The package also includes an appraisal from a professional appraiser, and comparisons (comps) of recently sold properties in the immediate area of the house in question. As a potential investor, you can review all of the data to see if it meets your approval criteria. Once you approve the loan, we can make an offer on the house.

The appraisal and comps allow us to predict the selling price of the property after the renovation. This is the After Renovation Value (ARV). For First Trust Deed loans, we typically never borrow more than 65 or 70% of the ARV for the protection of our investors.

For our own safety and the safety of our investors, we are very conservative in calculating the ARV. We want to be able to sell the home quickly after the renovation is complete. For the safety of our First Trust Deed investors the property is offered as collateral for the loan. First Trust Deed investors receive a First Trust Deed, giving them the right to take over the property to recover their loan. In addition when the loan is completed, we will open an escrow account and deposit the first 6 months interest on the loan into that account with instructions that the lender be paid monthly.

Documents provided with the loan:

All are provided by us to the lender at no charge to the lender.

So lets put it all together in an example and compare this loan with a 12 month CD at the bank. In the example below the house is sold 12 months after the purchase was complete.

First Trust Deed LoanBank CD
Interest Rate12%.95%
Points3
Home purchase Price$130,000
After Renovation Value (ARV)$220.000
Rehabilitiation cost$22,000
Gross Profit (ARV – price – rehab)$68,000
Loan Points3
Investment amount (.65 * ARV)$143,000143,000
Points paid to Investor$4,290
Interest paid to Investor$17,160$1,358.50
Term of investment12 Months12 Months
Total return to investor$21,450$1,358.50

Comparing the investments, investing with us results in almost 16 times the return as investing in a CD. Typically we will want to sell the house much faster than 12 months. So let’s look at the same investment where we sell the house in 4 months. Of course the investor will earn a lot less interest because the loan is paid off early:

First Trust Deed LoanBank CD
Interest Rate12%.95%
Points3
Home purchase Price$130,000
After Renovation Value (ARV)$220.000
Rehabilitiation cost$22,000
Gross Profit (ARV – price – rehab)$68,000
Loan Points3
Investment amount (.65 * ARV)$143,000143,000
Points paid to Investor$4,290
Interest paid to Investor$5,720$1,358.50
Term of investment4 Months12 Months
Total return to investor$10,010$1,358.50

In this scenario you only make a little over 7 times as much as you would if you held the CD for a year. But your money is now available to do another loan. And our profit went up by about $10,000. So if we did 2 more identical deals in the year that you would have been holding the CD your annual return would be $30,030 or 22 times the amount you make with the CD. Your return on investment by making three very safe First Trust Deed loans is 21%, compared with .95% with the CD.

Safety

Your biggest concern is protection of principle. This is achieved because you never lend more than 70% of the ARV. In our example above, there was $77,000 equity in the house after renovation.

What happens if we can’t finish the project? You can claim the property and either finish the project and sell the house, or just sell the house as is. Your interest is in an escrow account already, so you are guaranteed to get your interest. Your principle is secured by the value of the home. The home price would have to drop over $77,000 in a few months for you to lose any principle.

The bottom line is that we can offer a high rate of return with high safety to the investor. Give us a call or email us at ted@mzimapropertysolutions.com.