While it might be tempting to invest in deeds of trust offering the highest returns (i.e., trust deeds charging borrowers the highest possible interest payments), such investments are incredibly risky. One way to mitigate the risk of borrower default is to invest in smaller loans. The larger the loan, the larger the interest payments the borrower is obligated to make and the higher the chance of default.
Therefore, investing in smaller loans is always a good risk management strategy in the case of deeds of trust.
All this talk about default might make you wonder ‘why should I care if the borrower defaults? Cant I simply foreclose on the property and resell it for its fair market value?’
Promised returns are not actual returns when it comes to investments.
So while a deed of trust may promise a greater return because it charges borrowers a higher interest rate, in most cases you may never actually achieve any return on these “high-yield” investments.
Even though trust deeds have fewer regulations, foreclosure is never a clean cut process. If a borrower defaults bankruptcy is the likely outcome. The legal complications of the bankruptcy process will hinder your ability to repossess and resell the property.
While the court sits on its hands and various lawyers argue over the details of the borrower’s case, your loan is still in default. So while the bankruptcy proceedings slowly make their way through the court, you as an investor, are getting nothing. You cant foreclose, repossess or resell the property until the bankruptcy goes through and your deed of trust is essentially becomes a worthless piece of paper.
Even after borrowers bankruptcy clears the courts, and you manage to foreclose, you are not out of the woods yet.
In almost all cases foreclosure on deeds of trust results in a loss. Foreclosed properties are rarely sold for their full market value because buyers always expect steep discounts.
Unlike you, an individual private investor, banks (the ones who most often carry out foreclosures) are under heavy regulatory pressure to quickly offload foreclosed properties. Due to this fact there is a prevailing assumption on the part of buyers that any foreclosed property should sell at a steep discount. Therefore, it’s basically impossible to get full resale value on a foreclosed property.
So with deeds of trust, you never want your borrower to default. Bankruptcy part of the borrower means you will make no return on your investment as the bankruptcy proceedings make their way through the courts. Foreclosure in almost all cases will result in a substantial loss.
So mitigate the risks of bankruptcy and foreclosure when it comes to investing in deeds of trust. To enjoy the maximum benefits of this type of investment, invest in small trust deeds that charge borrowers reasonable interest rates. This strategy can protect you from risk and allow to enjoy the many benefits involved with these types of investments.
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.© 2016 Level 4 Funding LLC. All Rights Reserved.