The Dos and Don’ts Every Trust Deed Investor Should Know
A loan made to an individual or a business can be secured by real estate or real property. This is called real estate lending or trust deed investing. A trust deed investor can receive an excellent return from their investments but it’s not necessarily easy.
There are several basic dos and don’ts that every trust deed investor should know before investing. Here’s what you should know.
Know the market value. The market value is the the sale price, the cost to build, or the value in use to a specific owner does not necessarily represent the market value of the property. According to the California Department of Real Estate, “The market value of the Property is critical to your decision to lend your funds or purchase a promissory note because there is a possibility that the only way to recover your investment is through the sale of the Property. Therefore, the market value of the Property should be correctly estimated and the total loan-to- value ratio properly analyzed as illustrated below. This information should be made available to you before you commit your money to the transaction.”
Don’t ever make loan extensions, additional advances, modifications or any other changes of to an existing real estate loan without first obtaining written approval from any junior lien holders of record. Improperly executed extensions, modifications, rewrites, subordinations, or changes of any other kind of changes to a note and trust deed can result in loss your investment. There is not a valid reason for a trust deed investor to alter or modify a note.
Verify the borrower’s representations about capacity to pay. You should examine their verification of employment, income tax records, verification of cash deposits, and any statements from existing lenders reporting amounts owed. According to the California Department of Real Estate, “When considering the borrower’s capacity and desire to repay, you should ask whether the borrower has, immediately preceding the request for the loan, borrowed a substantial amount of money. A significant amount of concurrent borrowing may indicate the borrower is experiencing difficulty meeting his or her financial commitments.
Don’t buy a note secured by something you would never think of owning yourself. According to MarketWatch, “There are plenty of good, solid houses that would make wonderful rentals but may not be in the location you’d like to reside or have enough room for you and your family.”
Do remember that you may have to come up with revenue in order to keep your investment from deteriorating. For example, a real estate owned or REO property (a class of property owned by a lender after an unsuccessful sale at a foreclosure auction) may require the trust deed investor to come up with cash to pay expenses such as property taxes for a certain amount of time until you can realize what the outcome is of your investment.