Trust Deed Investment Terminology You Should Know
A trust deed investment is investing in specialized loans secured by real estate that are provided from the private sector. Trust Deeds are recorded to secure Promissory Notes signed by the borrower, which clearly state the interest rate, payment terms, time period covered by the Note and any special clauses. Here are the terms you should know.
A promissory note is a written promise to pay or repay an amount of money. The money can be repaid in a certain number of installments or on demand to a named person. The person who receives the loan is the borrower and they become obligated to repay the debt by signing a promissory note which will specify the amount of the loan, the interest rate, the amount and frequency of payments, the due date of repayment, and the penalties imposed if the borrower fails to timely pay the payment. The promissory note identifies both the borrower and the person who will receive the payments. Essentially, the promissory note is a document that pledges the property as security for the loan.
Trust Deed Investing
Trust deed investment is loaning money that is secured by real estate as collateral. The trust deed investor loans money to the borrower, and the loan is secured by the real estate of the property. Most trust deed investments are relatively short term loans (maturity under five years, with many loans two years or less) made to professional real estate investors.
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 difference 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.
Power of Sale
A power of sale provision is a clause in the trust deed in which the borrower pre-authorizes the sale of property by way of a non-judicial foreclosure in order to pay off the balance of the loan in the event of a default.
Investors who pursue trust deed investments are attracted to the diversify they bring to their investment portfolio, generate regular income, minimize risk, and typically produce higher return rates than traditional investments in stocks and bonds. Also, trust deed investments offer more consistent returns compared to fixed-rate bond investments, which are subject to fluctuations due to changes in interest rates and the economy.