Category Archives: Trust Deed

Understanding Documents and Processes: Deed of Trust
In many cases the Deed of Trust is presented as an “offering” by a party that has an interest in presenting the investment in the best possible light through a sales department or Broker, both of which are commissioned on the dollars brought in.   In this quest to get the dollars from the investors to earn the fees, many times the documents and process are over-simplified to reduce objections and shorten the fund raising process.  Missing, inadequate documentation in Trust Deed investing carries a high potential for unnecessary litigation and or principle loss from the investor if the borrower defaults or the Mortgage Broker closes its doors. The documentation an investor needs generally falls under one of a two categories; Borrower and Property. Borrower documents include;
  1. Completed loan application,
  2. Credit reports, credit history verification or references,
  3. Income documents, financials, Tax Returns,
  4. Use of Funds plan (from the proposed Deed of Trust),
  5. Exit...
Second Trust Deeds
A second Trust Deed is also called a second mortgage and maybe referred to as mezzanine financing due to its subordination to a senior debt, but in the realm of private lending usually does not have an equity stake in the asset.  A second position Trust Deed is recorded after the first position Trust Deed and is second in all considerations such as payoff and payments to investors.  This significantly increases the risk of the investment for the investor. These loans are sometimes attractive due to the higher interest rate charged to the borrower and passed on the investor.  In many cases the second Trust Deed is offered as being ‘as secured’ as the first Trust Deed by the value of the asset with an opportunity to get a higher yield.  This is where PITFALL #4 becomes very important.  A potential investor in this type of...
What You Need to Know About Limited Exit Strategies
Exiting the investment is one of the most crucial aspects of Trust Deed investing; it determines the net or actual profitability of the investors.  An investor should never assume or accept the primary exit strategy offered by the borrower or Broker, as in many cases it is the only real one for the investors. Remember the example on PITFALL #5? Well for the borrower the exit strategy is the development of the property for a profit, taking of the principle (for other uses) and Deed in Lue the property back to the investors to stop the Foreclosure.  The investors are left with typically an over-encumbered property (that’s why the borrower defaulted) to decide to take a principle loss now or wait to see if the future offers something better in market valuations. Solution: Invest in properties that have multiple exit strategies; improved properties that are rentable for cash...
What is a Loan to Own Underwriting
A common theme and industry standard in private lending is that the largest portion of underwriting is based on the value of the asset in relation to the amount of the loan (LTV) and is touted as the ultimate insurance plan for the investors – and if anything goes wrong; the lender will take the asset and recoup all losses based on the lower LTV.  For our purposes we will call this: loan to own underwriting.  Certainly the value of the asset is of fundamental importance to the underwriting as the value of the asset is the actual security for the principle.  However; this is a significant PITFALL in the industry as it manifests itself as the projected cure for any issue.  This form of underwriting almost begs for inflated valuation of the property and may ignore threats to the transaction such as; weak due...
The Pitfalls of Interest Revenue
An industry standard is for a Broker to strengthen the offering (to Investors) of the Trust Deed to investors by creating an interest reserve for the borrower.  An interest reserve account is money set aside to ensure the investors interest payments on a loan over a specified term.  This can be a good feature in the correct circumstances; however often times the actual source of the interest reserve and the math is not to the benefit of the investors and this may hide the weakness in the borrower’s cash flow and qualifications. The PITFALL occurs by a taking a good attribute and distorting it with the Deed of Trust originator and the borrower.  For example: Borrower acquires a parcel of land for $100,000 with $50,000 down payment.  This land later ‘appraises’ for $500,000.00 based on that value; Borrower requests a loan of $375,000 (75% LTV) The investor is offered...
Taking a Good Attribute and Distorting it with the Deed of Trust Originator and the Borrower
An industry standard is for a Broker to strengthen the offering (to Investors) of the Trust Deed to investors by creating an interest reserve for the borrower.  An interest reserve account is money set aside to ensure the investors interest payments on a loan over a specified term.  This can be a good feature in the correct circumstances; however often times the actual source of the interest reserve and the math is not to the benefit of the investors and this may hide the weakness in the borrower’s cash flow and qualifications. The PITFALL occurs by a taking a good attribute and distorting it with the Deed of Trust originator and the borrower.  For example: Borrower acquires a parcel of land for $100,000 with $50,000 down payment.  This land later ‘appraises’ for $500,000.00 based on that value; Borrower requests a loan of $375,000 (75% LTV) The investor is offered...
The Risk of Investing in Unimproved Land
This is sometimes dressed up for investors by calling it; ‘future value investing’ or ‘specific-demand collateral’ this is the highest risk Trust Deed investment available to investors.  The investment is technically secured (investors have a recorded Deed on land with an APN number) but for all practical purposes this is a speculation play and should be treated by all parties as such. In any non-cash flowing property Trust Deed opportunity; investors are recommended to underwrite to the payment ability and reserves of the actual individual borrower, market scarcity (speed to exit) and reasonable value – which is still a guess.  Investors will need to know substantially more about the person behind the loan as there is not any reasonable expectation typically for any cash flow on the property to support the debt (Deed of Trust).  Multiple personal guarantees are a normal part of this type of...
The Risk of Investing in Incomplete Property
These two issues are put together as they appear the most in the same transactions in private lending.  The staged or multiple funding scenarios are most prevalent in new construction and rehab loans – properties that are not ready to market or cash flow.  The Deed of Trust is created by multiple fundings at scheduled times for the borrower.  The borrower doesn’t want to pay interest on the entire loan if they can only use portions at a time to construction schedules.  So, the broker will set up a funding schedule with the borrower based on his needs and use of funds.  The Broker will then have several fundings or opportunities for the investors to get involved.  This scenario is risky as investors are putting their money into property that is not complete, therefore not marketable or sellable which significantly reduces exposure. And if one of...
Can Mortgage Brokers Be a Pitfall of Trust Deed/Mortgage Investing?
Most Trust Deed investing for individual investors is facilitated through a Mortgage Broker.  For the borrower; the Mortgage Broker advertises that he has money to lend and negotiates the terms of the loan, is to conduct due diligence on the borrower and the property.  For the investor; the Mortgage Broker advertises that he has investment opportunities for the money of investors in properties.  Simply put; the Mortgage Broker is simply acting as a middleman between those that have the money and those that want the money. A successful Trust Deed Broker is typically every effective at marketing and sales as they must consistently cater to two groups at all times; the borrower and the investors to create a transaction so they can earn their fees.  However in most cases; at the core; they are not true Real Estate guys. The interest in the transaction usually begins and...