Sibling Buyouts on Trust Property, with Justin Aldi of HCS Equity

0:02 Welcome to Fractional Interest podcast. I'm Bill Gross. One of the key times we get involved with Fractional Interest as a problem to be solved with financing is when there's siblings and one has to buy it out. And so, we're excited to have here today an expert in the field, a private lender who services all over Southern California, but one of their focuses is on loans to trust property, Justin Aldi of HCS Equity. Justin, thanks for being on the podcast. Thank you, Bill, for having me. And so, you may recognize my hat. I'm a Probate Weekly podcast as well. So, talk a little bit about I do know that you do a wider range of hard money loans than just this. Let's talk about this particular product though, the loans to estates or to I should say trusts as opposed to loan to a person. What are the key differences for you as a practitioner in that business? The difference being that the trust, after it has turned to an irrevocable trust upon usually the passing of the original settlors, at most trusts become irrevocable at that time, which makes them an entity onto themselves. So, instead of lending to mom or dad or the siblings, the trust itself is now treated similar to a corporation or LLC. It itself obtains its own tax ID number and the signers for the trust, which would be the successor trustees in this case, are signing solely in the capacity of the trust as a trustee of the trust. So, there's no personal liability.

1:32 The trust is treated as its own entity. We don't have to gather up any of the traditional underwriting requirements that might be placed upon an individual such as credit, social security numbers, income, assets, all the normal rigmarole that a traditional lender would require for a individual borrower. Those are bypassed because the trust is now treated like a corporation basically, and we are basing our lending decision on the assets of the trust, I.e. What properties that the trust owns. And the major difference is that these loans are meant for a short-term solution to fix several issues. One of them could be a sibling buyout. Some of them could be that the trust is in need of capital for evicting tenants. There's a lot of reasons, but the main difference between an individual loan, a regular hard money loan, and a trust loan is that our trust is its own entity with no personal guarantees and no liability upon those signing for the trust. We have to remember that a lot of times on an irrevocable Go ahead. I'm sorry, Bill. No, you go ahead. Well, a lot of times on an irrevocable trust, even though we might have siblings involved on an irrevocable trust, a lot of times neither one of those siblings or any of them are the trustees. Sometimes we have a fiduciary involved or a bank officer or outside family member. They have no They will sign for things, but they would never want to have any personal liability for what the trust is doing.

3:11 So, our trust documents or our loan documents accommodate the limit There's no liability upon them. They're only signing in the capacity of a successor trustee. Yeah, and that's why it's important because you know First, I'll say is the industry fiduciaries, professional licensed fiduciaries in California, there aren't enough of them. And one of the reasons why is the ones who are smart realized the potential liability not of your loans, but just in general that job. And they were careful to limit their liability cuz their fees aren't commensurate with the risks they take. I have a client who he might get a nice fee, but it's a $40 million estate. You can imagine the legal liability if something goes wrong. And so, in a case like that where he's exercising on behalf of the trust, he is very careful to limit his liability and I think you know, that's prudent. So, let's talk about you mentioned what you don't do. Let's talk about what you do. So, imagine a case where you have a trust where the decedent had set up ahead time, good planning, so common, but okay, it's done. They're deceased. The property passes from revocable to a non-revocable status. And there's a successor trustee whose job it is to divide these assets. And so, for whatever reason, they need to borrow money, maybe a buyout or like I say, or equity. What does the process look like? I mean, you don't have the standard Fannie Mae app loan application. You're not asking for pay stubs and tax returns. What you know, what is the actual process look like in order to have you evaluate it and make a decision as what to do?

4:45 The first thing that we're going to do is look at the collateral or a combination of what properties that the trust can encumber. If mom and dad took care of everything correctly and put the properties into the trust in the first place, and we there we don't have to go through a Heggstad petition to get the properties dumped back into the trust. So, let's base it on the fact that all the properties are in the trust properly, we will look at the value of the properties. Number one. Number two, we will confirm with a copy of the trust and any amendments or restatements that have been done that the trustees, the successor trustee, whomever that may be, has the power to encumber the trust. Most 99.9% of the trusts that we come across, the successor trustee, whether that's the children or an outside fiduciary or somebody, has the power to encumber the property. So, number one, we look at the value. Number two, we look at the legal documents to make sure that the trustee can sign. Number three, we ask the beneficiaries what the ultimate goal is with the property. We Our loans are meant for being short-term to take care of a particular capital need at the time. Whether that's a sibling buyout, equalize, whether that's cash to evict people or fix up the house for sale, we are very focused on what the ultimate goal is with the property to provide the liquidity to repay our loan within a certain time frame. Usually, our loans are either six months or a year, sometimes two years, but we don't want to set the beneficiaries who are going to eventually inherit this house up for failure with our short-term loan.

6:23 We want to make sure that they have a concrete plan. And that is either There's usually two avenues. Number one, that There's three avenues. Number one, that the actual property is going to They're going to grab some money to fix up the property, rehab it, and they know they're going to sell it. Very simple transaction. Second option usually is that the siblings will settle, equalize among themselves. One or two of them will buy each other out to take advantage of Prop and maintain the property and then they will refinance the loan in to a normal conventional loan. We want to make sure that step has gone as far as possible with qualifying them and so forth. The third option is sometimes that the remaining beneficiaries actually have the cash themselves from the sale of another property or whatever They have the cash and they will repay our loan the moment the property is awarded to them at the end of the distribution. So, those are the three common scenarios. So, first step, look at the property, look at the collateral. Number two, look at the legal documents. Number three, confirm that they have a takeout plan. Then the rest of it is very simple with title, escrow, and the process is only about a 7-to-10-day process once we've confirmed legal the documents.

7:40 So, let's go through step by step the look at the asset or the equity in the property. Commonly, I'll have a trust document. I'll have a listing off a schedule of properties and or a pull of property to verify the legal status. I'll do a prelim and see, you know, the property is deeded in the name of the trust. So, we know that's the case. Do you do a formal appraisal? Do you drive by the appraisal the property yourself? What is it that you need most commonly in order to make your assessment as to what the property's worth? In my experience, often times these are fairly low loan-to-value situations. Just the nature of it is they're just short liquidity, but they have a lot of assets. But what is it that's required you know, in most cases? And I imagine in some cases you do have to be a little more detailed. That's correct. We look at it on a case-by-case basis. Nowadays with the technology, I would say 90% of our loans are done without a formal appraisal done. We and because of the safe loan-to-value ratios on most of these files and how easy it is to determine values, we can bypass the appraisal process. With that being said, most estates have had some type of valuation done either from an expert like yourself or a formal appraisal at the date of death to substantiate the value at that time. We can use those reports also. If the property is a very difficult to value property or there's concerns regarding environmental issues such as a hillside property or a neighboring a gas station or something of that nature, then we will require an inspection at the cost of the trust. They need to pay that up front.

9:11 But that's very rare unless we're really pushing the envelope of how we feel comfortable with the value. Most often not, we can tell internally what the value is or with their or with an existing valuation that the estate has already done already. I think you're right. Most trusts I deal with that become irrevocable, they need a date of death appraisal one way or the other, either be a court-appointed or more commonly even a private. And it's done and then as a as an agent, we want to know about that, get a copy of it, and use that for the appropriate vendors to save doing an additional appraisal. Whether it's good or bad news, sometimes it doesn't matter. You just had it done, the work done, and if the if state paid did a proper appraisal, that can be, you know, maybe two bites of the apple or two used two ways. So, now we've established the value of property and talked about the legal status. Again, you know, we have a copy of the trust that includes you know, naming who the successor trustee is. The title company obviously requires certain things in order to transfer property. Are your loans done with title insurance? All of our loans are done with title insurance. We rely on the title companies to review the trust to confirm that the person signing our loan documents has the powers under the trust to actually encumber the property. Like I said previously, most trusts that we've come across allow the successor trustee to encumber their properties for the use of the trust or to gain encumber the money use the money for the trust, excuse me.

10:35 So, once we get that copy of the trust, we forward that to the title company. They will have their legal department review it, confirm the correct vesting. If we need to work with the attorney if it's if the affidavit of death has not been recorded yet, we will record that affidavit of death along with our loan documents, which will now come back to having an a certified copy of a death certificate, not a copy but an actual stamped copy from the county. So, make sure if you are a beneficiary or a trustee, you have one of those on file. Always order a couple extras. They will eventually make their way back to you after recording, but it takes a while and you need one to open a bank account, you need one to record a loan. So, we need a copy of that death certificate unless the attorney has already recorded an affidavit of death. It's about 50/50 depending on how soon we get this loan. It takes the title company no more than 24 hours usually to re to return a decision on who can sign for the trust. Right. If there's been transfer or six transfer trans successor trustees have transferred their trustee duties to other people, we'll need those resignations and the appointments of a new trustee. If there is disagreements between the beneficiaries, this is sometimes where it can get a little complicated. Even though that the trustee has the official power to encumber the trust under the rules of the trust, we and the title companies enjoy a letter from the from the beneficiaries, all beneficiaries that are named in the trust, acknowledging that they are aware that the trustee is taking out a loan for X amount. Very generic letter, but it has to be in the file that all the trustees acknowledge that this trustee's That's a protection for us and a protection for the trustee that nobody can come back and say, "Well, nobody told you to borrow money. You're taking this money for yourself for this or that. We didn't know about this." So, we will get a simple acknowledgement letter. It does not have to be notarized. It does not have to be an

12:38 Original. It can be a faxed or emailed copy or even a picture of one that's signed by the beneficiaries. Or the attorney can substantiate in a letter that based on his or her opinion, section so-and-so of the trust allows this trustee to take out a loan without further approval. Any of those things work. So, it's interesting it's an interesting point because the notice of proposed actions most commonly done on probate cases and trusts, sometimes they use that format for the letter that you're referring to. And then there's cases where the title company wants a notice, but the attorney will say it's not required legally and I'll say, "Well, we have two choices. We can change title companies or we need to provide the notice." There's no third option. And often we do change title companies. One of the points you make, the attorney will write a letter that nobody else is required most commonly because there's only one heir. If there's a trust and it's clear there's one heir and maybe they're either not acting as administrator or they are, the attorney might write a letter saying that and there's no need there's nobody else to notice but the person who's going to sign the loan documents or this one party. And so, that's a case where you're being a little more lenient. Sometimes I've seen title companies mistakenly say, "No, we need the notice anyhow." And you know, if it's not required, it's not required and we don't want to create opportunities for conflict. We're not So now we have a property we identified, we've reviewed the title.

14:00 Let me go back a little bit. So, as far as reviewing the documents, very commonly the attorney and or I've already opened a title report and we've started the process for whatever reason may be it's complicated, there's numerous parties, numerous properties. And so, I presume that you're open to working with, you know, reasonable title companies subject to some something outstanding, but you work with the basic companies, you're open to it. If something's open with a Chicago Title or Lawyers Title, you're okay with that already? Any title company that's nationally recognized will be fine with us. They all end up underwritten to the same basic guidelines. So, yes, we will be happy to work with almost any title company and escrow company. There's no problems. And so, the key is for attorneys watching or and or real estate agents, you open the prelim right away and then you see who the successor is, get those documents right away. They'll tell you about the affidavit, get that filed right away. There's no reason why we could suggest that you should need to do anything because the rules are the same either the lender or the title company, so she title insurance, are going to be the same as far as what's required and so that to me that's just good fundamentals get that stuff done early. So, now we have we have a property with equity. We have a approved pathway of somebody who can sign it and move that and the estate will approve it. We mentioned that these are short-term loans designed to help step through some sort of problem with some sort of timetable. What are the common rates and fees for a product like this? It's not cheap unless you compare it to the savings, in which case it says it could be very cheap even if it seems expensive. Can you Can you give me a range of the of the rates and the kind of fees that go along with something like this? Sure.

15:33 Our rates are anywhere between 11 to 12% for first trust deeds. They often have no payments due, which means that the interest accrues during this timeline and is due at the time of payoff, which helps if there's a cash flow situation, if the property is vacant or if it's pending sale, if there's a hold up, they if the loan-to-value ratio is low enough, then we can do it with no payments due. Our typical fees are usually two points plus third-party fees for escrow and title and loan amounts can range anywhere from as small as $30,000 up to, you know, the sky's the limit, four, five, six million if necessary. Some of the problems that this these short-term loans cure as we've discussed before can be a Prop 19 buyout situation between siblings and a short-term cash need either to take a property out of a distressed condition. Often a reverse mortgage is due and payable. Often there's maybe back due payments and property taxes, maintenance on the property, evictions of uncooperative tenants, prepping a property to maximize the sales price. Debris removal so you can even get to the property and most importantly right now actually in California is obtaining insurance on a vacant home, which is expensive but obviously necessary if you're going to be showing a home or trying to sell it. You cannot go a day without homeowner's insurance from a liability standpoint.

17:00 And for those who are listening, you know, you mentioned the price 11 to 12%, but the key part you said also, you know, third-party fees, that's what they're going to charge, title escrow, if you need appraisal. Again, you can reuse perhaps appraisal you've done already. You're not charging any additional processing fees or document prep fees or

17:15 We do. We have our That's part of what I consider third-party fees. We have depending on the size of the loan, you're looking at another about $2,500 in loan documents, processing, underwriting and so forth. Do we have a fee for

17:27 And then the two points is determined on a, you know, of a loan of at least a probably about $250,000. If we're small smaller loans, our minimum fee is $5,000. So, even on a $30,000 loan, it gets a little costly, but as you indicated, Bill, some of the problems that this is curing such as having a notice of default on title from something and being into a very having to force sale, quick liquidation with every bargain hunter out there noticing it versus having a clean title and having some runway to sell the property in an organized fashion helps. Well, also your fees are cheap but compared to other loans I've worked with. While the rate is might be a little higher and this is just the way you're pricing it, you know, at two points. I've done these loans at six, eight, and 10 points and so when they were the only alternatives we had. And so, you know, I would much rather pay 12% and two points and try to get something paid off soon and it gives an incentive to pay off soon to the estate which they want to do anyhow probably versus paying substantially more points. And as a real estate agent, I don't I don't charge for it. I just try to refer it to somebody who's going to do it for us. So, it sounds like it'd be a substantial savings. Again, every deal's different and these are for larger deals makes more sense. Smaller deals, you're right, but sometimes that small deal is part of a domino effect I find.

18:45 If you get that one done right, then the rest all fall into place. So, I you know, every situation should be looked at. And I always say it's only expensive if it's really expensive. Meaning to you win the If you can save some money up front, save some tremendous you know, on a fractional interest in a property. We talked about this in other episodes. The discount that the state's looking at might be 20, 30%, 35% discount to the fair market value of the property. So, if you're paying extra five or six point percent to get the loan done, but you save selling it in a in a disadvantage position, you might be saving the estate net 25% or more. So, that's where the this process comes in. And again, don't take my word for it. If you're doing any of these cases I'm involved I'll give you a piece of paper that will show you, "Here's the cost, here's the savings and let's make an informed decision and let's be smart about it." it's gotten a lot easier with automation to do these things. So, Justin, what do you see as the I you know, I it's so funny. I literally I before we started talking today, I mentioned to you how my stepfather, shout out to Ed Gooz, is a long-time practitioner of probate. He had his preferred vendor who does these kind of loans. I knew the preferred vendor. We weren't really a fit. I don't want to get into why, but very nice guy. And but you know, he had only done these a certain way, but so many surprised because he's an older attorney. So many attorneys look at this as oh, it's just too expensive. They dismiss it out of out of hand. Yet it's like anything else. It's just a financial tool that may or may not make sense given your situation. So I know you don't spend a lot of time you know, arguing with attorneys as to why you're valuable.

20:19 But you know, you must get that pushback and then at times people are smart make the right decision and for them, you know, what's the case you make? Explain to me why is this a good value in some cases and why they should be open-minded to at least evaluate it. I think it's fairly easy to determine the value especially on our sibling to sibling buyout when you're going to be able to preserve the prop 13 tax base on these homes. You look at the existing what mom and dad have been paying for the last 40 years on taxes. You look at what the property taxes would be if you were to re-buy this house at $700,000 and you estimate how long you're going to live there and it's very easy to say okay, you're saving $6,300 a year. This loan's going to cost you $12,000. So in a matter of 2 years you're ahead of the game and then even if you choose as we've seen not to live in this property forever even for couple days. You can take that tax base now with prop 19 and move it to a new house. So even if you don't dream about living in your old mom and dad's house, one of the siblings should take advantage of the if this if they're over 55, they can take that tax base and move it to their the home of their dreams and save that for the rest of their life. So that's the number one. That's an easy to quantify dollar amount. Say okay, you're saving $6,300 a month a year.

21:40 How many years are you going to save this for versus the cost of the loan? Black and white numbers. Based on some other situations let's say neither one of the siblings wants to keep the home. Yet there is a desire to improve the home for sale or possibly get rid of the tenants that are in there and taking out a small loan even though it might cost you five or six seven thousand dollars. That would be working with Bill to see how much extra in value is this house going to sell for. So it might cost you five or ten grand to get this loan. But are you going to be able to command extra 20% on the sales price because you don't have uncooperative tenants or because you were able to get rid of all the trash around the house or fix the broken windows. There's lots of situations where you can bring the house up to decent standards and at least get a pool of buyers that are not just the discount rehab guys jumping on this at a discount rate. So it might cost you ten grand, but you're going to get 30 grand back or 50 grand on a net sales price. So those are the very easy to work formulas on whether this loan is worth it or not. And sometimes you don't have a choice. Sometimes there are reverse mortgage due. They're in foreclosure. You're still accumulating interest and foreclosure fees on the reverse mortgage. It's going to take you another four or five months to get through the probate process and the reverse mortgage lenders are just not giving out any more extensions. So you have to pay them off.

23:02 Let me help let me help with that because I've very I have a Reverse Mortgage Podcast as well and I've spoken at regional meetings and there are originators who say well, the loan comes with an optional extension. I say yeah, it says right in the documents that the lender may offer what I'm talking about is when the decedent passes a reverse mortgage, those loans aren't assumable. They aren't transferable. And if both the husband and wife let's say both pass, if one passes, it may continue in many cases, but if both pass or the last one passes, they have six months from the day of death do they have to sell. And the lenders in nowadays race to foreclose. They typically sell the servicing right away so that they're not involved in the loan anymore and they take it from the nice friendly reverse mortgage origination company to the dastardly foreclosure based law firm hidden as a loan servicing and they're racing to foreclose and forcing you to quickly. And when you call them, they'll say oh yeah, send us a letter. Oh yeah, we'll consider extension. Oh yeah, we'll think about but they're not going to in my experience is they never give extensions. They will and it says in the documents the lender has the option to give you an extension. Right, what they don't say is and they have the option not to and they never will. And so this is a case where if you are in that situation, reach out to me or just or somebody appropriate.

24:26 Don't wait for the lender to give you the extension. It is very rare particularly in California. Now Justin, we've talked so far just about trust loans. Do you also do probate loans and reverse mortgage payoffs in those cases where you do lend on the arrears or do you refinance the whole thing if the loan to value makes sense? Is that kind of part of your portfolio? Absolutely. As you just indicated Bill, as these reverse mortgages lenders have become more and more aggressive in their collection efforts and unwilling to give any type of extensions. It used to be very easy to get an extension. An attorney would write a letter and a reverse mortgage they'd kick that can down the road six months, another three months, six months as long as you were showing some movement on the file whether it was working through the probate process or listing the house. That has stopped. 100% stopped and they are very actively foreclosing on houses regardless of the situation unless the attorney can go out and possibly get a temporary restraining order which is very difficult. Well, it's expensive and doesn't really solve anything. It just delays things longer and then you have another hearing and another hearing and so each of those cost more attorney's fees and expenses. And in LA County actually it's pretty much automatic I find that almost any judge will grant delays on foreclosure.

25:44 Now the lender now is collecting penalty rates. So the loan that was already at six or seven percent now it might be charging 12%. Same as your rate would anyhow. And on top of that they may they may limit it two or three times. I've seen judges lose patience. In Orange County I find judges are not. If you if they had six months they file probate, the judge say well, why didn't you file? You're obligated to file the will. You didn't do this. You didn't do that. So it just depends on the judge. The judge can decide whatever they want. So again, these are things where people say oh, don't worry. Well, they're saying that about your equity, but with your equity I think you should worry about it and take protection not right it to the very end. So good. It's good to know that you do this cuz frankly for now I met I'm I imagine a probate you need to have the letters issued and have and know if it's full authority or limited authority in order to move forward. But it's good to know that you're that you do that kind of loan cuz I do get these type of inquiries more often. Okay. And so last thing I guess as we come to the end of the time I got with you. I appreciate your making time for us today. You know, you're obviously a business to business primarily focused professional. You get referrals for your product and service from I imagine attorneys, fiduciaries and real estate agents. What are the common threads that you see of those professionals that are most successful?

27:06 If you were advising somebody who's getting into this business, what's something you'd have them focus on in order to be successful in this field? Focus on as an attorney or a fiduciary? Yeah, the ones that you work with like the you work with good ones. You work with bad ones. I would say people look, I work with bad attorneys. I help them, you know, that's part of my job is I'm glad to work with attorneys don't know what they're doing. That's why they hired me in some cases. But I like to work with the ones that are good. But obviously we all see the ones who are so good we go wow, I hope to be as good in my business as that person is in his. So I would say of the people who refer you business attorneys or professional fiduciaries or Realtors®, what are the common threads in this space of dealing with succession real estate, trust real estate, probate real estate? What are the common threads of success that you see of those people? I believe that most of them have a solid team of service providers around them such as a CPA that knows death taxes and estate taxes and so forth. Sophisticated real estate agents that understand the probate process. A title service that knows the ins and outs of the court system and how to approve notices and so forth. And then obviously a lender and an appraiser that both know how to do data death appraisals that will comply with IRS requirements and with the county assessor's requirements.

28:27 So having a good team around them and leaning on that team for advice. Even though they're all the attorneys that I work with and fiduciaries are very professional and know their business as we've all known in our lives. We don't know everything about everything and they will lien on us for our advice. We can you and me and so forth can provide that advice to them. I hesitate to provide legal advice to clients. I'm not an attorney neither are you, but we can provide our guidance to the attorneys who can then use that raw information to provide a more of a global solution especially on high net worth individuals that seems to hopefully work with all their beneficial interests that are involved. It's and a little bit of psychology involved with families that sometimes don't see eye to eye on the end game. Well, the brief for the of your brief there is you and I met through one of my key vendors Kevin Sayles at Lawyers Title. Shout out to Kevin. He's been on this podcast and really kind of helped me launch my probate focus about six years ago. He's been an instrumental in my business and does such a great job educating and both real estate agents and attorneys. He does a CLE education for the bar here in Los Angeles quite a bit. So yeah, you're living proof that the Rolodex is important though I just met you through him recently. So I'm glad we met and look forward to continuing. And more than that today I really appreciate making time to educate you know, the people who are trying to improve in this business, real estate agents and attorneys working in the space. Loans to trust and estates and probate. We have today Justin Aldi of hcsequity.com is the website. And if you want to see his phone number or email, they're on the list as well.

30:02 [phone number] and [email address]. Justin, thank you so much to today for your time in teaching us about your loan product and service and look forward to working with you in the future. Thank you, Bill. Appreciate it. And for the rest of you, this is the Fractional Interest podcast. We get together with attorneys, vendors who work in the fractional interest space, buyouts between family siblings, family members, businesses, whatever the case may be. If I can help anyway, please reach out at Bill Gross Probate in social media and as always make today your best.