Make Smart Investments: Trust Deed Investment Introduction
Before you start investing in trust deeds, you will want to read this trust deed investment introduction. Here are the basics that you need to know:
What is Trust Deed Investing?
Trust Deed Investing is when investors invest our money in Trust Deeds secured by real estate. Basically, the investor becomes the bank and they can earn a much higher interest rate than a conventional bank. In the current economic climate, savvy real estate investors are purchasing properties at foreclosure sales for bargain basement prices, refurbishing these properties, and reselling them for a profit. These house-flipping investments take a matter of months which means hard money loans are perfect for these types of investors. Trust deed investors help these real estate investors get financing and make a profit and the trust deed investors make money from the interest rates.
What is a Promissory Note?
A promissory note is basically an IOU that contains the promise to repay the loan, the trust deed is the document that pledges the property as security for the loan. It is the trust deed that permits a lender to foreclosure if you fail to make the monthly payments. Investors will receive a copy of the following documents after the funding of a loan:
- Executed promissory note
- Recorded deed of trust
- Title policy
- Insurance on the property
Who Are the Parties in a Trust Deed Investment?
There’s the trustor, the trustee, and the beneficiary. The beneficiary or lender is the person or company that lends the borrower money. The beneficiary is entitled to be repaid from the proceeds of a foreclosure. Every deed of trust names a beneficiary who receives the deed of trust in exchange for having provided some sort of benefit to the trustor. The inclusion of a trustee in the deed of trust is one of the more important differences between a mortgage and a deed of trust. The trustee can be an individual, a business entity, or a title company agreed upon by both the trustor and the beneficiary. If the trustor complies with the terms of the deed of trust, the trustee is not obligated to do anything more than act as the holder of the legal title to the property. If the borrower defaults on the loan, the trustee has the power to foreclose on the property on behalf of the beneficiary. The trustor under a deed of trust is the same as the borrower under a mortgage. The owner uses the property to secure the repayment of a loan. In order to be valid, the trustor must sign the deed of trust in the presence of a notary public and file the document with the office for recording property records in the county where the property is located. The deed of trust then becomes a lien against the property.
Are trust deed investments safe?
If a borrower fails to pay their loan, the trust deed investor is protected by the margin of safety. Since the trust deed investor acts as the bank, you can foreclose on the property and sell it to recover the investment and past-due interest. Because hard money loans are generally short-term, real estate values are unlikely to change dramatically over the loan’s term. When structured properly, trust deed investments offer an attractive current yield with relatively low risk which makes it a safe investment. If the property value is high relative to the loan amount, then the investment should not lose money even if the borrower defaults on the loan.
In a trust deed investment, a broker acts as the middleman who brings together the private money source, the beneficiary and the investor borrowing the funds, the trustor. There are important legalities that need to be followed and it is wise to have a real estate broker involved in the process.
The broker arranges all signatures on the promissory note and the deed of trust and then arranges for title insurance and the recording of the deed of trust.