Trust Deed Investing: What You Need to Know
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What Is Trust Deed Investing?
Simply put, trust deed investing is investing in loans that are secured by real estate. This is especially the case if you’re interested in investing in deeds while minimizing your risks.
What happens is the person (or entity) borrowing money in this transaction will transfer the property, in trust, to a third party who is independent (a neutral party who is not affiliated with the borrower or the lender).
As an investor, you stand to earn a higher interest yield than traditional banks would earn on the transaction plus your investment is secured by the value of the real estate or the borrower’s equity.
What Do You Need to Know Before Investing in Trust Deeds?
If you’re thinking of investing in trust deeds, there are a few things you need to know and understand before you get started. Understanding these key details can help you make sounder real estate trust deed investments. Before you offer your first trust deed loan you need to learn a few things about the transaction you’re considering, including the following essential details:
The reputation of the mortgage loan broker (MLB) who is arranging the transaction. It’s important to align yourself with partners in this business who have outstanding reputations and long histories of dealing fairly and justly in their real estate transactions and dealings. This will help you avoid potential disaster when investing.
The market value and equity of the property that is serving as security for the loan. One of the most critical pieces of information to understand when investing in real estate is the amount of money you are likely to get out of the transaction should the borrower default. This is otherwise known as the market value of the property that is being used as collateral for the loan.
Financial standing and credit score of the borrower. While the value of the property is the primary concern in many real estate trust deed transactions, the creditworthiness of the borrower is also relevant and should not be overlooked when determining the appropriate transactions for your first trust deed investments (or later investments for that matter).
How the escrow process will work in the loan process. While there are some aspects of escrow that are fairly universal, every escrow transaction is also somewhat unique. It’s important to have specific instructions about which conditions need to be met to satisfy the terms of the escrow so that funds can be released to the lender and borrower alike.
What documentation will be needed to complete the transaction (from borrower and lender alike)? Documents are an important part of any real estate transaction. It's important to know which documents you need to provide and which you need to receive as part of the transaction.
Who will handle the loan servicing? Servicing involves things like collecting and disbursing payments, mailing notices and monitoring the status of senior liens.
How to recover your investment if the borrower defaults on the loan. Since most people who default on real estate loans are also late on other payments, it may become necessary to for you to pay senior liens (taxes, insurance premiums, deeds of trust, etc.) in order to protect your interests in the junior deed of trust. This is a consideration that must be made prior to investing in trust deeds.
A trust deed investment fund is a viable option for investors who are interested in earning a greater return on investment than banks will offer on money sitting in savings accounts. But this type of lending is not without risks. It is best to align yourself with a partner who has your best interests at heart when investing and to learn as many facts as possible prior to investing.
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Loans are offered under either: California Bureau of Real Estate License 01897444 or California Finance Lender License 6054605
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