Private Money Lending Trust Deeds

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 Wise Investment

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.

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.