Deeds
of
Trust
A Not so New
STRATEGY
INVESTING
M
any people ask why
they have never heard
of Deeds of Trust or
Trust Deed investing. Is this
concept “New”? Not at all. I can
remember my neighbor telling a
story of how farmers in his home
town who were unable to obtain a
bank loan to purchase additional
farm land would approach an-
other farmer in the community to
lend them the money. A contract
would be drawn up and filed with
the county recorder office. A
third party would act as the es-
crow holder until ownership title
to the property is released to the
borrower upon satisfaction of the
debt. This was a common way
to develop and construct in areas
that were insufficiently serviced
Realty411Guide.com
by traditional banks.
Due to the rise of real estate securitization in the 1990s and the
shift from “lend to hold” to “lend to securitize”, deeds of trust have
become a common way for builders and developers to purchase real
estate. Besides purchases, deeds of trust can also be used for loans
made for other kinds of purposes, such as construction and develop-
ment, where real estate is merely offered as collateral. Non-tradi-
tional or indirect financing offers benefits for the borrower that is not
met through traditional bank financing.
Banks are limited in the amount of money, or the percentage of
their lending portfolio, that can be lent out for commercial construc-
tion and development. Also, banks rely heavily on the creditwor-
thiness of the borrower when evaluating loan requests. Trust Deed
lenders effectively evaluate the borrower but focus on the collateral
has a greater determining factor for a loan. Since these loans tend
to be short-term, less than 5 years, higher rates can be charged and
still be advantageous for the borrower when compared to the lengthy
process involved to obtain bank financing, if a viable alternative.
Another primary reason for not hearing about Deeds of Trust
investing has to do with geography and how home financing is
executed. In 20 of the U.S. states the laws regarding financing of
real estate purchased is regulated and facilitated under state agen-
cies. These states use Deeds of Trust instead of traditional mortgage
notes to execute home purchase transactions. In states that use deeds
of trust, there are always at least three parties involved; the borrow-
er, the lender, and a trustee who holds title to the property until the
debt is paid. In the remaining states mortgages are used to facilitate
residential lending direct from the lender to borrower. In mortgage
states, the transaction involves two parties; the borrower and the
lender. Should the borrower default on the loan, the lender must
sue the borrower in a state court in order to take possession of the
collateral property.
The term, Mortgage, is sometimes used when trying to explain
Trust Deeds. However, the concept behind a mortgage and a trust
deed are similar with some major differences. >
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