From Jack Miller's Blog:
Most of the money I’ve lost over the years has been because I wasn’t properly secured with adequate collateral for loans, leases, Options, and contracts.
This was probably due to the fact that, when dealing with strangers, it’s easy to demand appraisals and inspections, title searches, mortgages, Deeds of Trust, and Confessed Judgment Liens as security; but when dealing with friends and close associates, I’ve made the mistake of thinking that past and current relationships would protect me against future mishaps.
Since then, I’ve learned to my chagrin that even the closest friends and family members will save themselves first and renege on promises if it will help them avoid financial disaster. Certainly I’ve been disappointed many times in the past when this has happened to me, but I can understand why someone would choose financial survival over going down the tubes paying all his remaining funds out to creditors.
I think the key to being properly secured is to only do business in ways that will prevent this from happening; and that boils down to being able to make loss of collateral more painful and costly than reneging on financial promises.
That leads to the obvious rule: Before you accept collateral, make certain that it is worth far more than money you are going to invest. That may mean that more than one property will have to be mortgaged, but so be it. The easiest way to do this is to simply show all the legal descriptions of the pledged property on one mortgage or Deed of Trust document along with a short sentence that gives you the right to foreclose any or all of the pledged properties as you may choose.
In cases where the other party might have been willing to take a flyer on a property with your money, he might have second thoughts about risking his home, car, business, bank accounts, etc. on the same venture.
Mortgages and Deeds of Trust can be used to secure real estate debts, Options, and Leases; but how do you tie up other property?
With bank and stock brokerage accounts, you can set up a special escrow account for cash and/or securities, then have minimum amounts of cash or stock transferred into it. The account would instruct the escrow agent in no uncertain terms to transfer the assets to you in the event of default.
I usually spell out in my escrow instructions that upon receipt of a certified letter spelling out the precise nature of the default. Two originals of this letter are sent by certified mail to both the escrow holder and the defaulting party, absent of payments being brought current, or Options being exercised, or leases being performed on, within 10 business days, the escrow holder is directed to release the collateral to me.
When personal property such as a car, motor home, boat, etc. with titles are pledged as security, the title can be liened. When jewelry, furnishings, electronic equipment, etc. are pledged as collateral, they should be sequestered in a secure location. Alternatively, a special Trust can be formed and they can be transferred to the Trust, then 100% of the Trust shares can be assigned as collateral to you, or to the foregoing escrow holder.
What about intangible personal property such as a Land Trust beneficial interest? It is common for both the beneficial interests and Powers of Direction to be assigned as collateral until the promises have been fulfilled. A UCC-1 can be filed to put the public on notice that these items have been previously pledged.
All of this adds a lot of time, expense, and trouble to what could be a fairly simple transaction unless you round up all the paperwork you need and have it ready to use where you do business. Then it’s just a matter of filling in some blanks and having signatures witnessed and notarized. If I’d taken the trouble to do this, I’d have saved a bundle over the past years. You could save a bundle too.
