Pitfalls of Trust Deed Investing and How to Risk Less

Published by admin at October 11, 2015

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Many
homeowners think the only people involved in their mortgage are them and the
bank. However, this is not usually the case as most loans also have a trustee
who has engaged in the process of trust
deed investing as a way to build an investment portfolio.

Trust deed investing is
generally considered a relatively safe investment because it is backed by real
property than can be used as collateral in the event of default. However, like
any investment there are risks. Namely, deeds of trust are not insured by the
FDIC so there is not guarantee that you will get your money back. Also, if the borrower
declares bankruptcy then the home cannot be easily foreclosed on without a
lengthy legal process. Depending on the outcome of this process, it is possible
to lose some or all of your investment.

These risks are not unique to trust deed investing as every type of investment does have some inherent risk.
There are a few ways to minimize these risks and maximize your profits. First
and foremost, work with a private lender or equity firm that is experienced in trust deed investing. Make sure that
your lender has loaned on deeds of trust before and can explain the process to
you, including any and all risks.

You can also help mitigate risks by doing your due diligence. Research
a property’s title status and market value. This will help you make sure there
are no issues with the title that would prevent a foreclosure. Knowing the
market value will help you ensure that the property will be worth the amount of
the loan or more in the event of default. This is especially important because
the bank will get paid back before you do so you want to be sure there is
enough money to recoup your investment. Sound intriguing and want to know more?
Keep reading to learn the ins and outs of trust deed investments and how you can get started today!

How Trust Deed Investing Works

When you buy a property in Arizona and finance
through a bank like Wells Fargo or Bank of America, most people think the bank
holds the deed to the property. This is not the case. Usually someone’s grandma
in Oklahoma or an investment banker in New York purchases a promissory note,
funds your loan, and retains the legal title to the property. Sounds
complicated, but really it is not, it is all part of trust deed investments.

The investor in trust deed investments purchases an interest in a mortgage through
a promissory note. The investor can purchase the full mortgage or a part of it.
If the investor purchases the full deed, he/she must have enough capital to
fund the whole mortgage. If a fraction is purchased then the investor puts up a
fraction or percentage of the value of the mortgage or promissory note. In this
case the investor has the option to purchase a first or second deed of trust. A
first deed of trust means that the investor is first in line to be paid back in
the event of default while a second deed investor is more at risk for losing
his money.

Once you have purchased trust deed investments, you officially hold an interest in the
mortgage. You also hold the legal title to the property on behalf of the bank
(the borrower retains possession of the physical property). Each time the
borrower makes on time payments, you earn interest from the bank. The interest
rates on trust deed investments are
often higher than the interest rates on stocks and bonds. Once the loan is paid
in full either by sale or after the mortgage term, you get your initial
investment back. Basically, the bank pays you to hold onto a piece of paper for
them.

But why? This is the main question that holds
many people back from trust deed
investing. Why would the bank pay you interest to hold a paper for them?
The reason has to do with foreclosure procedures in the event of default. The
bank cannot hold the title to a property so if there is no trustee, the
borrower retains both the legal and physical tittle to the property. If the borrower
defaults, this makes it very difficult to foreclose. If the legal title is held
by a third party, a trustee, the trustee can foreclose on behalf of the bank,
making the process much quicker for the lender.

Trust
Deed Investing is a Win-Win for the Investor and the Bank!

Learn more about this lucrative investment strategy by calling a
private lender or equity firm today! While trust deed investments are safe when done correctly, loop holes and other
paperwork issues can get in the way. Make sure you use a financial professional
to help you navigate the world of trust deeds!