The Pitfalls of High Fractionalized Investing

A fractionalized Trust Deed is a loan that has many investors who pooled their money for the total principle balance for the borrower.  Typically the interest of the investor is based on what their dollar amount is expressed as a percentage of the total loan amount.

A. The more investors and the smaller any one investors stake in a given Trust Deed the less control those investors have.

B. When a Trust Deed does go back to the investors those that have more capital to commit end up carrying the cost such as foreclosure filings, attorneys, maintenance, management, taxes and insurance to name a few for those that do not have the funds or will not pay.  In many real life cases; the investors with more to lose (higher principal investments) are more compelled to contribute to keep the asset in good condition.

C. Voting is often controlled by percentage of ownership of the Deed decisions are usually looking for at least 50% majority; those with the largest voting power make the decisions for the rest.  So, if an investor puts 50k into a 2 million dollar Deed of Trust where other entities have committed over 500k, the smaller principle investors vote will account to very little if anything.

Solution: 

While this may present as an opportunity for lots of investors, it actually weakens and complicates the individual investor’s involvement.  The reality is the fewer entities and decision makers for a Deed of Trust the better for all parties.  If this is what an investor wants, it is recommended that the investor verifies that management policies are in place in the agreements and understands the voting procedures in the event the investor’s control the property.