Trust Deed Investing 101
What is trust deed investing?
At the simplest level, trust deed investing is when an individual lends money to a borrower who is purchasing real estate. The source of this money can be from savings or retirement accounts. The broker finds the borrower who wants the loan, and the private party with the money provides the funding. The broker then arranges for the borrower to sign paperwork to show the world the agreement to borrow money and the terms. The two most important documents in a trust deed investment are the Deed of Trust and the Promissory Note.
What is a deed of trust or trust deed?
A deed of trust, once signed by the borrower, is recorded at the County Recorder’s office where the collateral is located. The recording of the trust deed “clouds” the title and lets the world know that the debt exists. When a title company researches a property, it is usually looking for trust deeds (or evidence of indebtedness). The recorded trust deed is also the trust deed investor’s security; it allows him/her to be paid when the property is sold.
What is a Promissory Note?
The Promissory Note (“promise to pay”) is signed by the borrower and kept in a safe place by the trust deed investor until the loan is ready to be repaid. This document is not recorded. The Promissory Note shows the details of the loan including interest rate, payment schedule, and terms.
Who are the players in a trust deed document?
There are three parties mentioned in a deed of trust document: the beneficiary, the trustee, and the trustor.
The beneficiary is the lender. Most people are accustomed to seeing banks named as beneficiaries. However, in the private lending world, it’s usually an individual or a retirement fund named as the beneficiary.
The trustor is the borrower. The trustor may be a single person, a trust, an LLC, nonprofit, or a corporation. The borrower, by signing the trust deed and Promissory Note, is agreeing to the terms of repayment and gives permission for the loan to be recorded against the asset.
The trustee is given certain powers in a trust deed. Should the borrower default, the trustee is allowed to follow a simplified foreclosure process in the state of California called a trustee’s sale. This procedure is shorter and less expensive than a judicial foreclosure (a court process uncommon in California).
The trustee sale process allows the trustee to hold a sale of the property after the proper time has elapsed. When the trustee’s sale is conducted, the property can be purchased by what is known as a “third-party bidder,” or it can “revert” to the lender. In other words, at the conclusion of the trustee sale, the ownership of the property is transferred to either the lender or to the winning bidder.
Who are the players in a trust deed investment?
In a trust deed investment, a broker acts as the middleman who brings together the private money source (the beneficiary) and the investor borrowing the funds (the trustor). There are important legalities (covered later) on why a broker is highly recommended and necessary for this type of transaction.
The broker arranges all signatures on the promissory note and the deed of trust and then arranges for title insurance and the recording of the deed of trust.
