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Below are frequently asked questions about Trust Deed Investments:
- What is a Trust Deed?
- A Trust Deed is a document recorded with a county recorder’s office creating a secured lien on real property which provides collateral for lenders and trust deed holders. Some states use a Mortgage instrument rather than a Trust Deed.
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- How does it work?
- A borrower who owns or wants to own real estate needs a loan. The borrower executes a Promissory Note wherein the borrower promises to repay the lender. The recorded Trust Deed creates the secured interest attached to the borrower’s real property. If the borrower does not pay as promised, the Lender/Trust Deed Investor can look to the real property for repayment and/or recovery of their invested capital.
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- Why would an Investor get involved?
- A Trust Deed investment occurs when an investor purchases all or part of the Note and Deed of Trust. The Investor can earn a 9% to 11% annualized yield and receives monthly interest payments.
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- What are the benefits of Trust Deed Investing?
- Investors enjoy monthly interest payments on their invested capital. Yields are higher compared to other fixed income securities. Real estate collateral is often viewed as more tangible than stocks and equity investments. Mortgage Brokers who specialize in this type of investment arrange the transaction, collect and distribute monthly payments, and handle most problems that may arise, through the payoff of the loan.
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- How do yields compare to other investments?
- The most secure is a government insured CD which currently yields approximately 2% to 3%. Government backed Ginny Mae mortgage pools yield approximately 6% to 6.5%. Next, are corporate bonds which are, essentially, unsecured loan obligations to large corporations. Current yields for corporate bonds range from 4% to 7%. Junk bonds are lesser quality corporate bonds that currently yield from 8% to 9%. Trust deed mortgage investments currently yield from 9% to 11% annually, with monthly interest payments.
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- Should I invest all my money into one trust deed or invest in a few different Trust Deeds?
- We believe in “Diversification.” It is advisable to invest a divided portion of your money into a number of different Trust Deeds with varying property types, property locations, loan-to-value ratios, and maturity dates. If one borrower does not pay on time the affect on your cash flow should be less. In other words, you would be diversifying your investments and reducing your overall risk.
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- How do I find a reputable Mortgage Company who specializes in Trust Deed Investments?
- Find a company that has a substantial track record of providing these types of investments. You can research the company online by accessing the website for the California Dept. of Real Estate (www.dre.ca.gov). Here you can check to see if the company has an active license or any consumer complaints against them.
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- From a borrower’s perspective, why would a borrower pay higher rates for their loans when bank loans are less?
- There are many reasons borrowers request private money loans. A few include:
- Fast loans
- Short term (1 to 5 year) loans
- Minor credit problems
- To pay judgments and liens such as Federal or State taxes
- Property may have some problems that make it difficult to obtain a bank loan
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- I have heard of First and Second Trust Deed Investments. What is the difference?
- The difference between a First and Second Trust Deed is the priority of the lien based on the date the Trust Deed is recorded. The earlier recording date would have priority (i.e. first position). If you have a Second Trust Deed and the Borrower fails to pay the First, you would be responsible to make the First Trust Deed payments or suffer the risk of being foreclosed out and losing your invested capital.
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- What should I look for when evaluating property for a Trust Deed Investment?
- Property type is the first item to look for. Point Center suggests that Investors choose mainstream real estate property in Metropolitan Service Areas “MSA” where there is a resale market. This would include properties such as: homes, apartments, commercial and industrial buildings, churches, and land. Avoid properties such as: water slide parks, fish farms, health clubs, and rural properties. You, the investor, should always require an independent appraisal of the property.
Another item to look for is the ratio between the mortgage loan and the value of the real estate, pledged as security, which is expressed as a percentage. This is referred to as the Loan-to-Value Ratio:
| LOAN | = | LTV | $500,000 | = | 62.5% (LTV) |
| | | | | |
| VALUE | | | $800,000 | | |
This means that the loan, expressed as a percentage of the property is 62.5%. The higher the loan-to-value ratio, the greater the lending risk because the protective equity declines as the LTV increases.
Example: A single family home with 4 bedrooms and 2 ½ baths is valued at $425,000. If we are making a 70% of value loan, the loan is $297,500. ($425,000 X .70 = $297,500) The difference between the value of the property and the loan is $127,500. This is referred to as “protective equity” or “equity cushion.”
Never accept a “Broker’s opinion of the value” or a so-called “in-house appraisal” directly employed by the Broker. This creates an obvious conflict of interest.
You should also require the company to obtain title insurance, insuring your lien position (First or Second) and insuring the property is free of unexpected liens & encumbrances.
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- What Borrower considerations should you be concerned about when making your decision?
- Point Center is primarily a collateral based lender and to a lesser degree a credit based lender. In other words, we look first to the real estate collateral and secondly to the borrower’s credit to determine the likelihood of the borrower’s ability to repay the debt. We obtain an appraisal report, a credit application including financial statements, interview the borrower personally and then make our decision accordingly.
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- How do we get paid off at the maturity date of the loan?
- Part of our initial underwriting is to determine the borrower’s exit or payoff strategy. Generally, the borrower will sell the property and pay off the loan with the sale proceeds, refinance with another Lender, or extend the loan with us.
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- What should an Investor expect in their investment package from a mortgage broker to help them make an intelligent investment decision?
- In order for you to make an informed decision, you should require the following in your package:
- Loan Summary of the Trust Deed Investment
- Regional and Local Location Maps for the subject property
- Loan Application of the borrower
- Credit Report of the borrower
- Financial Statements of the borrower
- Appraisal from independent, certified appraiser with original photographs and area location map
- Borrower Escrow Instructions, copy of Promissory Note and Deed of Trust
- If your loan will be in second position, a copy of the first position Promissory Note and Deed of Trust.
- Current Preliminary Title Report issued by the title insurer.
- Written explanation of what items will be removed and which items will remain at the close of escrow.
- Indication of title coverage to be obtained.
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- How is the loan servicing handled?
- Point Center acts as the Loan Servicing Agent for all the loans that we offer to Investors. We handle everything from communicating with the borrowers to collecting the payments. We also monitor the status of property taxes and property insurance and issue demands for payoff statements and reconveyances once the loans are paid in full. We have over 26 years of experience in servicing loans which includes expertise in: slow paying accounts, bankruptcies, foreclosures, and liquidating real estate assets. We communicate regularly to assure that our investors are aware of the status of any loans that may not be paying as agreed and that we are carrying out our delegated responsibilities as requested.
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- How do we get started?
- When you are ready to invest, call Point Center. Let us know the way that you take title to your investments and how much you are prepared to invest. You may hold title as an individual, family trust, partnership, corporation, or as a corporate pension plan.
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