First off, if you want to invest in trust deed opportunities in California, it’s never safe even at the best of times. Depending on who you speak to, seasoned investors say it is risky for all – particularly for the beginner.
Dennis Melson, real estate agent and loan officer in California, points out that if your’e in this business you likely entered it in order to make a profit from loans that regulated lenders won’t or can’t touch.
“Now, “ He says, “we need to ask ourselves why they can’t or won’t touch them. There are three common reasons. First is there is something wrong with the borrower. Second is that there’s not enough equity. Third is that there is something wrong with the property.”
Most of these problems can be surmounted unless – the borrower has insufficient equity and, of course, if there’s something terribly wrong with the property. The second problem is insurmountable since it’s the property that you’re loaning him money for and it is the property that you’re relying on in case he defaults.
Problems are also insurmountable when they lump together such as when the borrower has: a hugely low credit score + is bankrupt + has a history of defaulted mortgage + is unemployed.
When the borrower has each and all – or most of – the above, he or she is more likely to default. If the borrower is fine in most of the above but owns a lousy property, you have nothing to fall back on if he defaults.
So what happens if your borrower’s not paying and it becomes a non-performing loan? You can hire an attorney but that’s more ripped dollars from your pocket.
And that’s just of the dishes of horrors that can go wrong in trust deed investing.
Four tips for safely investing in trust deeds
You can mitigate the risks in the following ways:
- Invest in home insurance – Home insurance is one way to mitigate the impact of some of the risks that may affect your property. Of course, you’ll want to sieve that property thoroughly before you accept it but you never know it’s hidden perils. Home insurance can be a protector of possible future perils.
- Learn the real-estate jargon – This may sound tedious and, somewhat boring, but there’s no substitute to knowing the field. Read up on the real estate jargon. Learn how the market works, check into what the projections are like, and master investment terms. Also look into market values, what the equity in the property is, and what the security of the loan is. You’ll know what you’re facing and will feel less like the New Yorker entering Burma for his first time.
- Who is the borrower? – Be the detective. What’s the borrower’s background? Does he tend to default? Or is he, cross fingers, reliable? How many jobs has he won and lost? His credit score? Character – is he self-disciplined and ‘put-together’? Is he dependable? Honest? You’ll be working with him for a while. You want to make sure he’ll prove a piece of candy.
- Who is the broker? – Ditto with the mortgage loan broker. He’s going to be another piece of your background. You’ll certainly want to feel comfortable with him and get the right vibes. Dennis Dahlberg, owner of Arizona Real Estate, quotes cases of people who have ended up fielding serial court cases because of their brokers. He advises you to toss your broker if you feel even the minutest doubt at the outset.
- Create a backup plan – What will you do if the borrower falls through on payments? How will you handle late payments? Outline these and other details ahead of time. Sure, you’ll insert them on the promissory note and you’ll share them with your broker and your client. But you’ll want to make the conditions clear for yourself ahead of time. You’ll also want to make sure that you’ve routed out all gaps.
Trust deed investments do have a reputation for risk.
They also have a reputation for profit.
Dennis Melson warns his readers that “while there is a lot of potential for gain, it’s some serious work to evaluate the situation, and usually some serious work and serious cash to make it work for you when it is right.”
Let’s hope that if you’re intending to invest, events will turn out better for you than his gloomy predictions forecast.