What You Need to Know Before Purchasing A Trust Deed Investment

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Investing in trust deeds is nothing new. Investors have often sought investment in either fractional or entire trust deeds because of the better than average rate of return and the security that comes in the form of pledged real property. Unlike stocks or bonds, where the investor is relying on market conditions to dictate returns, investing in a trust deed typically offers a fixed rate of return in the form of monthly payments and in most cases a return of capital at maturitu. This type of investment generally provides higher yields on capital with less risk than other market offerings.

The basic components of a trust deed investment are 1) a promissory note signed by the borrower and 2) a deed of trust which secures payment of the promissory note by establishing a lien against real property upon the recording of the deed of trust in the county where the real property is located. The trust deed holder is the lender, just like a bank, credit union or other financial institution. Trust deed investment allows an investor to participate in a loan secured by real property by purchasing all or a portion of the note and trust deed attached to a particular property and borrower.

The investor can either purchase the entire loan or a just fractional share. An investor that has adequate capital will often finance all of a trust deed loanAn investor that is the sole holder of a trust deed loan will enjoy more control over their investment in that the investor will be the sole decision maker with respect to collection of late payments, foreclosure, modifications and forbearances. Fractional participation in a trust deed loan will result in less control over the investment than owning the entire trust deed loan, but it provides an excellent vehicle to introduce investors to investing in trust deed loans. With a fractional trust deed loan, the total investment required is often less than owning 100% of the trust deed loan and the risk of the trust deed loan is shared by two or more investors. The fractional trust deed investor trades off the decreased exposure to loss with the sharing of control over the oversight and management of the investment with the other investors.Investors that prefer fractional trust deed investments often will participate in multiple fractional trust deed loans in order to spread the risk of loss rather than placing all of their eggs in a single basket.

Investment in trust deed loans offers an array of variables for each investment, including varying returns, property types, length of the loans, and risk profile. In most instances, a greater yield will be realized by investing in higher risk trust deed loans, such as second or third position deeds of trust and loans where the total amount of loans secured by the property represent a larger percentage of the value of the property, as opposed to investment in loans that are secured by first trust deeds with low loan to value ratios.Investing in multiple trust deed loans provides an excellent opportunity for consistent cash flow, since the chances that all borrowers will stop making payments is not likely, especially if the loans are properly underwritten.

Whether there is a single investor or multiple investors, a trust deed loan needs a loan servicer to manage the loan, including the collection of monthly payments on behalf of the investors and to disburse such payments, less fees and costs, to the investors pro rata. The loan serviceris often the broker who arranged the trust deed loan for the investors, but could also be a third party provider. The arrangement with the loan servicer is governed by a loan servicing agreement between the investors and the loan servicer. Typically the loan servicing agreement delegates authority to the servicing agent to receive payments, pay distributions to the individual investors, and communicate with and provide documentation to the borrower. The loan servicing agreement also provides instructions about the collection and deposit of funds, instructions on handling delinquent accounts, and limited power of attorney to enforce the deed of trust contract. The primary job of the servicer is to manage the trust deed investment account and protect the interests of all investors. This responsibility may include managing accounts that are not performing or are in default, and initiating collection activities. When investing in trust deed loans, emphasis should be on engaging a servicing agent who is experienced, competent, and lends confidence that he or she is looking out for your interest.

Most established servicing agents are good at what they do. They already have established systems in place to support the investors’ interests actively. Part of that system is online tracking software that allows investors to view payment activity, confirm trust deed loan details, and determine the status of their investments at any given time.

By working with a broker that understands the private trust deed market, and contracting with an experienced and highly competent servicing agent, trust deed investments can be a lucrative endeavor. These types of investment typically demand an 8% to 14% annual interest rate, with loan terms ranging from 5 to 20 years. Investment returns will vary based on the type of property, the condition of the asset, location, type of loan, and qualifying factors of the borrower. With the right team in place and a proper amount of due diligence on each deal, a qualified investor can participate in the trust deed marketplace with confidence that they will achieve positive results.

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