EMD Q&A with a potential investor ... share your thoughts 💭

Below is a list of questions & answers from a current email exchange with a potential investor. Investors are normally writing checks of $100k - $500k, so they tend to ask some good questions about how their money is secured before dropping it into a private fund.

This is a bit long, but I want to share this kind of dialogue in hopes that it has value to you. This was a 9 PM response from me on a Friday (maybe not an ideal strategy for when to respond lol) so I did not have time to write it shorter.

Please share your thoughts and even proposed answers.

🙋‍♂️ Question: "I still didn't fully understand the downside risk in secured escrow loans. What happens if the transaction doesn't go through (mortgage doesn't kick in due to financing not being approved, for example)?"

✅ There are three ways our funds can end up at some level of risk.

First, we don't cancel before the end of the refundable period (this has never happened) so the funds "go hard" and the seller has rights to them if the deal does not close. Even in this situation, if the deal closes we are paid out per signed irrevocable instructions. If it doesn't close, we have a promissory note and personal guarantee with the borrower to collect on the debt.
Second, we do cancel in time but the seller complains and the escrow company locks up our funds until either the buyer and seller agree to release it, or it's determined by a third party such as a judge. It would be very improbable that funds wouldn't come back to us but the delay is less than ideal. If they didn't, we have the same last resort options as above
Third, the title company just doesn't do what they are supposed to do per our contracts or the law. We send them a demand letter, if they choose to try to avoid responsibility we first pressure them via a complaint to the department of insurance (regulatory) that they are required to respond to in writing, and to the title insurance company that provides them insurance, allowing them to be in business. Either of those can shut down the title company. The title company as Errors & Omissions insurance to cover these errors on their part. The last option here, and one that I've seen successful is to file a lawsuit against the title company.

🙋‍♂️ Question: "Buyer (escrow loan recipient) needs to pay back the secured escrow loan, right?"

✅ Yes, as you saw above; however, we don't rely on their good will to pay it back; we use contracts and legal obligations.

🙋‍♂️ Question: "Risk of default on that?"

✅ There is always risk of default with any investment, including treasury bills. The only thing I have seen or heard over the years is that in the end one of the above doesn't pay out because the borrower filed bankruptcy with both the LLC and personally. Even this is not a sure bet escape for them.

🙋‍♂️ Question: "What's the historical default rate and how do you mitigate that risk?"

✅ We have yet to lose any funds due to any of the above items. However, we have had 3 deals over the last couple years get held up by title of be paid back via installment payments by borrowers. Each time we experience even a near miss, or hear of one from others we engage with in the market, we make adjustments to protect against it with our contracts, underwriting or funding processes.

🙋‍♂️ Question: "Any other scenarios where these loans can go sideways?"

✅ I listed all the ways we are aware of it happening to us or others in the market above. As a note, I own a separate company that does debt collection. It's not common we get EMD deals, but we have collected on a handful of them and they fall in the categories above.

🙋‍♂️ Question: "Why isn't this niche served by banks (who could presumably offer much lower rates)?"

✅ There is a myriad of reasons why banks fail to be able to satisfy all the lending needs in the US market. The private money lending market is over a trillion dollars in the US. This is a good sign of the level of lending that banks don't do better than the private market. One reason in this specific case of EMD is that banks are slow. These deals might fund in less than 24 hours and in most cases they fund in 1-4 days.

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EMD Q&A with a potential investor ... share your thoughts 💭