Trust Deed Investing Introduction

Trust Deed Investments can provide substantial returns with minimal risk.  Investors have two options available to them for investing in trust deeds, purchasing an existing promissory note or making a loan directly.  While similar in function to traditional mortgages, the main distinction between the two types of investments is that trust deeds involve three different parties—the lender, the borrower, and the trustee.  The person who is appointed the trustee operates as an independent entity to hold the legal title to a property on the lender’s behalf until the borrower has completely paid off the loan, but if a default were to occur, the lender can take ownership of the property.

Although double-digit returns on trust deed investments that mortgage brokers present may sound tempting, you should still be wary.  Investors should thoroughly research a property’s title status and market value before investing in a potential trust deed based solely on the promise of a high return.  Investors can start their research by acquiring a Preliminary Title Report from the past ninety days and making sure that the property doesn’t have anything that could affect the property’s market value.  As with any investment you should conduct your own due diligence.  Some things to consider while doing your research are:  Does the property have inexplicable encumbrances?  Unsettled legal concerns?  Is there a considerable variation between the appraised value and the assessed value?

Since the FDIC and other government agencies don’t insure trust deed investments, they are vulnerable to borrower default and the ups and downs of the economy; an investor could lose some or all of an investment.  If a borrower were to file for bankruptcy, the foreclosure process could be affected, resulting in a lengthy process, all at the cost of the investor.

According to a publication by the Cushman Rexrode Capital Corporation, “The court could modify the terms of the loan by extending the due date, changing the interest rate and payment structure, or causing the priority of the loan to be subordinated to a bankruptcy court-approved financing plan.”

An investor can even purchase one hundred percent of a single trust deed by making whole trust deed investments, entitling an investor to full ownership of the promissory note.  When dealing with whole trust deed investments, a single investor must have sufficient capital to fund the entire loan amount in order to purchase a whole trust deed.  The lender then receives a promissory note, and the insurance documents are recorded in the purchaser’s name.

However, with fractionalized trust deed investments, multiple investors—no more than ten—can contribute money toward purchasing undivided interests in a trust deed.  The entire amount is shared between multiple investors, so investors with less money to invest tend to find this option more favorable.  If a disagreement about how to proceed arises, and the borrower defaults, complications can occur.

Mortgage pools function similar to mutual funds except the investors possess trust deeds instead of stocks and bonds.  The financial risk is reduced through the diversifying of investments over numerous trust deeds, making the investors limited partners in the mortgage pool.

Investors should also decide whether they want to invest in a first trust deed.  First trust deeds take precedence over successive claims and are recorded first.  Second trust deeds have a greater risk attached to them because the first trust deed holder’s claim must be settled first.  If there isn’t enough money to satisfy both debts, it’s the second trust deed holder who will lose money.

The purchase of a promissory note or the funding of a loan should be carried out through an escrow.  The escrow instructions should require the promissory note and deed of trust be delivered to you or an independent custodian on your behalf at the close of escrow.  An escrow allows for specific instructions for the conditions that must be met before money will be transferred to the borrower, including selection of the title insurance coverage, resolution of existing title issues, and recording the deed of trust.

Trust Deed: Notes

The trust deed and note are the required documents whether you are using real property to secure the money you loan, or you are investing in a deed of trust. The trust deed becomes a lien on the property, securing the repayment of the money that is owed according to the stipulations in the note. The note shows the initial money owed and details the conditions for repayment of the trust deed.

All notes have the same purpose with the same end result, but there are several types of notes that you can obtain.

The note most often used is a promissory note. The borrower details in writing how much he will pay back, when he will pay and to whom, at a given date in the future.

In transactions involving real estate, the amortized note is used most often and stipulates that the borrower make payments every month of interest and principal for the duration of the loan.

A holder in due course note refers to someone who bought the not for value but was unaware of any problems or issues concerning the note when it was first purchased. The law protects the person who holds this note because it is assumed he is holding the negotiable note in good faith.

The straight interest only note is one in which no principal payments are made for the duration of the loan. The interest payments occur monthly and are negotiable.

Use extreme caution with the recourse note. The endorser agrees to give payments to all holders involved. A person could recourse a note so all payments go to just one person and nobody else so as an endorser you should think twice before using this note. The payment liability is very broad.

A note without recourse gives no guarantee of payments to future holders.

The demand note isn’t used often and only when payment is required in full at any given time.

Some notes contain an “or more” clause. This clause gives the borrower the right to pay the loan off early without penalty or to increase monthly payments as he sees fit. The clause is by the loan payment amount. The clause may also be removed, in the event that both parties agree, by an escrow agent.

Some notes are subject to negotiation but others are not. A negotiable note has to include the option of a promise to pay without condition that is based on the borrower’s future actions. It must also include a payment amount and date that is firmly set and payable to the holder. Most notes can be transferred with a signature.

In the event you lose a note, you must replace it immediately because it is not like the trust deed where the original is recorded. Even a copy of the original note is not worth anything. Only the original note is the life of the transfer and losing it is expensive.

Basically if the note is lost the only way to replace it is for the parties involved to draw up a new note. You may need a lawyer if for some reason this isn’t possible. You will have to go to court to restore the note in such a case. However in some states all you need is a lost note affidavit in order to restore the lost note.

The best to keep any papers and documents of great importance is a safety deposit box. Keep copies of all your documents at home so you can take a look at them whenever you find it necessary.

Investing In construction Loans

There are several kinds of construction loans for an investor and we will lay them out for you here.

The Improvement And Renovation Construction Loan pertains to making upgrades or improving the property in some way in order to raise the value.

A Grounds Up construction Loan is granted based on the assumption that the borrower has already secured the necessary permits and has drawn up plans that have been approved. The only thing left presumably, is the funding. The loan money can be drawn out over time if the lender approves.

Infrastructure Construction Loans are help the borrower to complete projects that need to be done before the actual building can begin. For example, the installation of utilities and water and sewer pipes, streets and so forth.

Construction loans have special requirements that must be met in order for everything to go according to plan. We will now consider these aspects.

The lender’s investment needs to be protected. therefore it is very important that inspections take place often during building. Plans are looked over again and again and kept consistently so that it can be ascertained the funding is sufficient for the project to be completed.

The construction company can maintain control and account for all funds spent from the beginning to the end with this kind of documentation. An in-house inspector prepares inspection reports of his findings from visiting the building site. The report indicates which projects are finished and which are still being constructed.

A preliminary lien notice is a requirement of most states where a construction loan is involved. The subcontractor sends a copy of this notice to the owner, lender and general contractor so that he can now lien a project. All parties involved are asked to send copies of their notices to the construction control company. In this way all subcontractors and those who supply products and services can be kept track of as the project progresses.

Control of construction is vital to a construction loan. Before a control company is acquired its disbursement policies should be carefully considered. Not all companies function in the same manner.Some companies consider themselves control companies when in reality they don’t actually function as such so it’s imperative that you ask up front whether a control company is being used and find out how it operates.

Trust Deed Investing: Enforcing The Loan

While it’s true that investing in trust deeds is relatively safe compared with other investments, there is always the small chance that a borrower will default on his loan for one reason or another. Should such a situation arise there are ways in which the investor can resolve the matter and still come out on top. The process of foreclosure is the usual method of recovering property when a borrower cannot honor the terms of the loan. different states may have different policies and legal procedures regarding foreclosure so the following information may not apply specifically to you.

Judicial and non-judicial foreclosure are the two most popular methods used in trust deed investments. The judicial foreclosure will require a lawyer and court proceedings and will be expensive. A non-judicial foreclosure is quick and relatively painless financially since it can be handled by a title company or reputable, independent foreclusre company. This method or process of foreclosure is the one most used for trust deeds.

the foreclosure officer will need certain documents from the investor before the process can begin. for example, the original trust deed that has been recorded and original note. A statement as to the amount of the loan still owed, the due date of payments, unpaid balance of the principal and how much of the interest has beenpaid to date will also be required. Once these documents have been turned over tot he agent he can then begin the foreclosure process.

A foreclosure can be instituted for a number of reasons and not all of them are financial. A borrower who fails to honor the provisions of the trust deed, though he may have made payments on time could still find himself in foreclosure for violating the terms of the trust deed. and of course any failure to make payments in full and on time, or to default on insurance and taxes can also be land a borrower in foreclosure proceedings.

The following documents will be necessary to start the foreclosure process: Declaration of Default (DOD), Notice of Breach (NOB),  Subsection of Trustee and non-military affidavit.

The foreclosure officer prepares the above documents and they are then signed by all beneficiaries.

In a non-judiciary foreclosure, the property can be sold to the highest bidder by the trustee in a trustee sale. The entire foreclosure process takes roughly 110 days to complete.

foreclosure may begin but it rarely is seen through to the end. Usually the borrower sees how urgent the matter is and will do everything in his power to save his home and land from being taken away.

Occasionally a borrower will file for bankruptcy in order to avoid foreclosure. Once the petition is gfiled in court, the trustee is ordered to halt the foreclosure until such a time as it can be determnined what the outcome for the borrower will be. It is in your best interest to respond immediately if a borrower files for bankruptcy to ensure you receive what you are due. this would include any legal fees incurred and other costs associated with processing the foreclosure. also included should be any fees endured that relate directly to the response made to the bankruptcy as well.

Pitfalls for Investors to Watch For

As with any investment you may get involved with, it is always a good practice to do your research so you completely understand what is involved in the process.  This is true for trust deed investments as well, even though they are among the safest ways to invest your money.  Although miniscule, some risks exist, so proceed with caution.  Here are some tips to keep in mind as you negotiate any transactions.

Don’t take the word of anyone else about the state and condition of any property in which you plan to invest.  Do your due diligence and check out the property on your own.  This way you can compare your own opinions with those of any appraisers, brokers or title companies.

Research the value of recently closed sales of comparable properties in the area, so you will have an idea of what the investment property is worth.  Review any existing appraisals and see if you agree with their findings or if you perhaps need another appraisal.

Make sure you are able to determine the difference between real property and personal property with regard to your investment.  Although real property is usually anchored to the ground in a permanent manner, some items fitting that description may be considered personal.  Know the difference!

Find out as much as you can about the borrower.  Know how the loan will be repaid.

Pay attention to loan to value ratios (LVT) and heed the recommended lending percentages.  If the owner lives in the home, the LVT should be under 60 percent; if the home is vacant or non-owner occupied, the LVT should be under 50 percent.

Make sure any promises of future improvements or renovations have been written down, if that is a consideration for the value of the loan.  In addition, ask yourself if you will want or require any other types of paperwork or documentation before you go to closing, such as well and roof reports, certificates of occupancy or notices of completion.

Learning as much as you can about trust deed investments will give you the advantage you need to become a savvy entrepreneur and investor.  Seek out others who have had success and ask their advice.  Review all of this information, tips and guidelines and become an informed investor.  Remember that knowledge is power.  The more you know, the less likely it is you will run into problems or pitfalls.  Good luck!

Escrow

You’ve come this far, and you’re almost done.  However, just like when you personally buy a house, funding a loan or purchasing a promissory note has to be completed through an escrow process. This impartial third party acts as an intermediary between the buyer and the seller, or in this case, the lender and the borrower.  The escrow agent will oversee the entire transaction and handle everything according to the contractual obligations.

As with all transactions, and before any money changes hands, the escrow agent needs to ensure that any loose ends are tied up so the transaction can be completed without problems.  Some of these issues may be the payment of any delinquent taxes, the removal of any liens, the selection of any required title insurance, and all of the details pertaining to the deed of trust or promissory note.  Each trust deed is different, so the conditions may vary from transaction to transaction.

Escrows for trust deeds will have specific instructions about the transfer of the land investment.  It is critical that every detail is in writing, even any commitments or promises that were made casually during informal negotiations. The information is very straightforward and parallels what is required for other real estate transfers, including the names and titles of both the buyer and the seller, a description of the property and the negotiated price, as well as how any taxes, insurance and other costs might be divided among the parties. Your escrow agent will review all of the necessary details, but as the investor, it is incumbent upon you to read all of the paperwork carefully, making sure you understand every detail.  Check that everything has been included and nothing omitted.  If there is something you don’t understand or seems unclear, ask your escrow agent for an explanation.  This is the time to make your concerns known and get answers.

Remember not to confuse your escrow agent with an attorney.  The escrow agent’s job is to work with you to ensure that the transaction happens as smoothly as possible.  They are not qualified to provide legal advice. Their only obligation is to your specific investment.  If you are dealing with a complicated situation that requires input from legal or financial professionals, do not hesitate to get them involved at this point so all of your concerns are addressed.

As an investor, you want to make sure that your trust deed investment is protected from both manmade and natural disasters, so remember to work with your escrow agent to arrange for whatever casualty, fire and liability insurance is required to cover any potential damages. You will want to have proof that the insurance is in effect at the time of settlement.

You will also want to protect your investment by making sure the paperwork states that you will receive notification in the event that any previous loans go into default and before any foreclosure actions start.  This could happen when taxes or insurance premiums haven’t been paid or when other obligations haven’t been met.

Your documents also need to include any other unique conditions pertinent to your trust deed investment, including any special conditions regarding late charges.  It is also important to note that repayment of the loan in full is mandatory, in the case of liens or ownership transfers.

As soon as all of the conditions and requirements are handled, you will prepare for the closing, or settlement of the loan.  This is when both buyer and seller come together to sign all the necessary papers, and the transaction is completed.  At this point, there is no turning back, and any effort to make changes or cancel the contract could result in severe penalties or serious legal problems.  Therefore, before you sign on the dotted line, make sure you understand and agree with everything that is in the closing documents.

Although most closings go smoothly, occasionally something comes up that disrupts the timetable for the settlement.  However, escrow agents are used to working out any problems and can arrange to have paperwork pre-signed prior to settlement. A power of attorney can also be used if an individual is unable to appear at the agreed-upon settlement time.

Once all papers are signed, the escrow agent will take care of the other formalities.  The title company will record the trust deed, the paperwork will go to the lender and the funds released to the borrower.  Although it sounds complicated, it is a routine process.  Once all of the perfunctory and procedural parts are completed, you will get a settlement sheet, showing the financial breakdown and disbursements of funds.

Finally, make sure you keep your paperwork organized and in a safe place, such as a safe deposit box or a fireproof and waterproof home vault.  Keep your escrow agent’s business card handy, along with your file number.  And be sure you have an extra hard or electronic copy of all documents available, in case you have any questions.

Congratulations!  You’ve successfully invested in a trust deed!

Borrowers With Special Needs

In the last installment we talked about the circumstances of the “typical” borrower—who he is and what he needs. But there are other typical borrowers who have special circumstances that create the need for a “hard money” or private money loan. When more people can secure loans, the number of trust deed investment opportunities rises.

Death, taxes, severe illness, unemployment and divorce are some of the most common unforeseen occurrences that can derail an otherwise responsible person and ruin his chances to obtain a traditional bank loan. Therefore, non-institutionalized lenders with more options and the freedom to include other criteria besides a FICO score are an attractive alternative.

What are some of the situations and circumstances of these borrowers?

Poor credit rating– In the times we live it’s not uncommon to find that most people are being left out due to imperfect credit. Any number of reasons including the aforementioned and more can be the culprit. Most people don’t actively engage in willful behavior that ruins their credit. However, once a borrower’s credit score takes a nosedive, his ability to buy anything on time becomes greatly impaired—even if his unfortunate situation has been resolved.

Bankruptcy– Obviously this one is serious and once a borrower has filed for bankruptcy it will be a long, long time before he can qualify for a bank loan again—if ever.

Irrevocable Trust—Once a trust is set up, it cannot be revoked without the consent of the beneficiary in most cases.

Tax and other leans—Estate, federal and state tax liens, property taxes and other judgments can work great hardship on a borrower.

Foreclosure—Nothing hurts a credit score more than a previous foreclosure on a home or property. And nothing makes it harder to obtain another loan. Even bankruptcy does less damage.

Trusts, probates, etc.—Inheriting a mountain of debt isn’t exactly conducive to good credit and neither is having money tied up in trusts a benefit.

Divorce—Some one will lose everything and someone will gain. Sometimes both parties are heavily in debt and with few resources after a divorce.

Unemployment— A borrower who loses his job is losing his livelihood and everything that implies—including his good credit standing.

Health and medical emergencies—One of the most common credit destroyers is an unpaid medical bill. They are quick to go to collection and they are often exorbitant.

Certain characteristics of the property in question may make it difficult to secure a bank loan. For example, as in the case of an income property that requires a high-vacancy loan in order to increase the occupancy. Or buildings not fully constructed or are very near completion. Retro construction to reinforce against natural disasters or improvements to the property for other reasons can make it difficult for a borrower to get a loan.

Private money lending is often the solution, which is another reason why trust deed investing is so smart for our time. Banks are faltering and bank loans are too stringent for the average borrower. Private money lending is where it’s at and trust deed investments are an integral part of that system.

Trust Deeds: Private Money Lending

Private Money Lending Trust Deeds

Private Money Lending Trust Deeds

Private money lending is a non-institutionalized, short-term real estate funding opportunity that uses the protective equity of the property as collateral for the loan.

There are a number of professional companies that specialize in providing loans that may not be available through traditional lenders. In other words, they obtain money from a variety of sources for trust deed investments. Sometimes the funds for “hard money lending” as it is sometimes called come from individual investors. Other times the money is obtained through hedge funds, IRAs, trusts, pension plans and REITs among others.

Borrowers who fail to qualify for the guidelines of a conventional loan from a bank require private money lending. Although an investor’s credit and income may be sufficient according to traditional guidelines, the classification of a trust deed loan as “sub prime” prevents the lender from granting the loan. Thus private money lending provides an attractive and reasonable solution with more lending options.

Companies who handle the specific needs of a private loan solicit, underwrite, process and fund private money lending and are safe and reliable. Naturally you would be wise to choose a company with a sterling reputation, possibly recommended by other investors.

Not all lenders will offer the same services but all understand the complexities of a trust deed transaction and creative financing. In general they provide underwritten, direct loans for borrowers. Therefore, they fund the loan internally after assessing the risks personally, instead of outsourcing to retrieve information. In this manner the terms of the loan can be adjusted accordingly and the loan granted within hours instead of days or weeks once the application has been submitted.

Private money lending companies offer unique opportunities for investors. The loan is first secured with a deed of trust on real estate and supported with the borrower’s personal guarantee. A Title Insurance Company that is known nationwide with a good reputation is responsible for insuring the deed of trust. The borrower pays for any costs incurred in the process of underwriting, documenting or servicing the loan.

The decision to fund the loan is based on the amount of equity in the property. This is the first assessment an asset-based lender will make and if that requirement is met, then the borrower is analyzed—his integrity, ability to repay the loan and whether the project is a viable one.

An officer of the lending company will personally inspect the property before a final decision to grant the loan will be made. Property values and appraisals are often confirmed in house by using sales analysis through interviews by real estate brokers who know the area.

Individual investors comprise by far, the funds for the majority of loans granted by most non-institutional lending companies. Each investor is provided with details of the loan summary including the terms of the loan, property to be used as collateral and information about the borrower.

Investors are supported and assisted through every stage of the loan process; another attractive feature of trust deed investing.

Trust Deeds: A Wise Investment

Trust Deeds Wise Investment

Trust Deeds Wise Investment

Investors have a variety of options from which they can choose to invest and grow their money. Each one carries its own risks, game plan and category. From the stock market to deeds of trust and savings bonds, investors can decide where they will put their seed money based on what risks they want to take and how well they can plan a strategy. With so many choices and with the uncertain economy, how can investors decide which avenue will ensure the safest and most profitable outcome?

Every investment venture has a degree of risk and yet trust deeds are shown to be the safest of all investments today. Why? Because a trust deed loan is secured by something tangible—acreage, houses and other valuable buildings.

Another appealing advantage of the trust deed investment is the higher rate of return. Private lenders are not constrained by the same set of rules a banking institution imposes. Therefore, loans are more flexible and granted more quickly with less hassle because the private lender has a broader criterion with which to work.

Going one step further, trust deed investments are appealing because the borrower has a great deal to lose if he defaults on the loan. His home and land could be taken away, which is incentive to do whatever it takes to make sure he keeps up with the payments.

The loan to value ratio will be higher if proper research has been done because the actual amount of the loan will be greater than the real value of the property.

Why invest in trust deeds? Like most people, you’re probably looking forward to retirement. To that end you will need to invest in a venture that enables you to take care of yourself and your loved ones when working is no longer desirable. Those who have invested for retirement concur that trust deeds are the most profitable.

At an earned interest rate of 10% compared with the 2-4% of a savings account, it becomes apparent that the earning potential of a trust deed investment far exceeds that of more traditional ventures. Not to mention being less risky than stocks and not as stifling as a low yield mutual fund.

Early retirement is an added benefit as well. With a 10% interest rate compounded annually, an investor can shave years off the time originally allotted for his retirement because he will reach a comfortable nest egg much sooner.

If you’re still not convinced, there are a number of other bonuses to trust deed investing.

1.    On average, borrowers pay more interest than traditional banks.
2.    The interest payments of a trust deed generate monthly income.
3.    You can trade trust deeds
4.    Trust deeds are liquid and therefore sell easily in most cases.
5.    Your protection is increased because amortization lowers the loan amount.

No doubt as your knowledge of trust deed investing grows you will appreciate how such an investment will reward you with a high return for your low risk investment.