Many investors like the alternative lending space where they can invest in mortgages , otherwise known as , Trust Deed investing , whereby they become the lender on real estate . The two major ways to invest in these mortgages is either in some kind of pooled investment [ a Fund ], similar to a mutual fund or owning the deed of trust on a specific piece of real estate , similar to owning an individual stock .
In the case of investing in a Fund , the investor invests in the Fund , and the manager chooses which loans to make to borrowers . In the situation of owning an individual deed of trust , the investor chooses which specific loan to invest in and is recorded on title . It is the latter that is the focus of this article , and specifically fractionalized deeds of trust where the investor shares ownership in the investment with one or more other parties .
Most note brokers [ in California ; other states may vary ] are licensed to fractionalize a deed of trust [ notes ] with up to 10 owners [ beneficiaries ]. Other brokers have licenses from the Department of Corporations to have more than 10 beneficiaries . The reason brokers fractionalize notes is usually because they are too big for one investor . A $ 40,000 note may be able to find a home with one investor , but a $ 700,000 note may need more than one investor in order to be funded . Each investor receives a recorded deed of trust [ for their protection as evidence for their loan ]. When the borrower pays the
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loan off , each investor is required to reconvey their interest in the loan [ notarized signature ] in a timely manner [ California requires this be done within 21 days of the request ]. The reconveyances are deposited in escrow , and each lender is paid off in escrow as well .
If everything goes smoothly , no one complains ; however , what happens if things don ’ t go according to plan ? What if a lender is unavailable to sign off in a timely manner ? What if a lender refuses to sign ? What happens if the borrower defaults on a fractionalized loan ? What happens if you have a minority interest [ less than 50 % ownership ] in a fractionalized loan ? These are just a few instances where a fractionalized lender faces challenges , and these challenges can be monumental .
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