Understanding – What Is Trust Deed Investing?
December 8, 2014Foreclosure and Trust Deed Investing: What You Need to Know
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One little known but high return investment strategy called trust deed investing can be a crucial investment for experienced investors to grow their investment portfolio. Investing in deeds of trust is a specific type of real estate investment wherein the investor, or trustee, invests money as a third party in the mortgage process. The bank or lender loans money to the borrower, the borrower repays
the money to the bank, and the trustee invests money directly to the lender in order to act a third party intermediary and hold the legal title to the borrower’s property. The lender then pays the trustee interest for holding the title. Interest rates a generally higher than most other investments at anywhere from 7 to 12 percent.
Not only does trust deed investing yield a high rate of return, it is also a rather low risk investment. The monetary investment is backed by the actual real estate purchased by the borrower. An accurate and thorough appraisal ensures that the property is actually worth the money that has been invested in it. If the borrower defaults the investor’s funds can be recovered by the sale of the property. In some cases, the investor can even take over payments from the borrower and acquire the property without an additional sale. This way there are no escrow fees, additional inspections, or closing costs.
Now that you know the benefits of investing in trust deeds, you are probably wondering how exactly it works and what your role as the investor is. As the investor, you invest money to hold the legal deed to the property. You do not live at the property nor do you have to maintain it, the borrower does this and he/she holds the equitable title to the property. If the borrower makes payments on time, all the trustee has to do is earn interest from the bank for the length of the investment term. Investment terms can cover anything from a few months to several years.
The Bank’s Role in Trust Deed Investing
A common question about trust deed investing is what is in it for the lender. This is a valid question because banks generally don’t like to give away 12% interest rates for free. In order to understand why the bank would engage in trust deed investing, it is critical to understand the two types of mortgages in the United States.
The first type of mortgage is a true mortgage wherein the only parties involved are the bank and the
borrower. The borrower holds the legal title to the property they purchase. If the borrower defaults on mortgage payments, the bank has to take judicial action against the borrower by actually suing them in a court of law. Only after the court has ruled in their favor can the bank take possession of the property via foreclosure. This is a lengthy process and can get quite expensive.
In trust deed investing, the trustee holds the legal title to the property and is paid interest by the bank for doing so. In the event of a default in payments by the borrower, the trustee can take legal possession of the property via foreclosure without judicial action. The bank can then sell the home quickly to recover their investment as well as the investment of the trustee. This is a much shorter foreclosure process and saves the bank money in the event of defaulted payments.
Investing in deeds of trust helps the lender protect their collateral while earning money for the trustee. The trustee’s investment is also protected by the actual physical real estate.
Investing in trust deeds is a high interest, low risk investment strategy. If the borrower pays on time, the investor literally does nothing other than collect interest. If they borrower defaults, the property that the borrower is making payments on helps to secure the trustee’s investment. This is perhaps the greatest benefit of trust deed investing. The investment is actually backed by physical collateral that the investor could literally drive by and see. The investor can also do a number of things beforehand to help secure his/her investment. The investor can use credit scores of borrowers to determine the riskiness of a particular loan. In addition, the property will be appraised to ensure that it can be sold to recover the investment if necessary. A further investment safe-guard is the requirement of all borrowers to obtain sufficient hazard and fire insurance. This protects the investor in the event of the property being destroyed.
If investing in deeds of trust sounds like a good investment opportunity to add to your portfolio, contact a broker that specializes in real estate investments. A broker can help you make the best investment decisions and help you start earning high interest rates with trust deed investing.
Level 4 Funding LLC
23335 N 18th Drive Suite 120
Phoenix AZ 85027
623-582-4444