Trust Deed Investments

Trust Deed Investment Best Practices

At FHLC we believe in taking a proactive approach when it comes to discussing risk. By partnering with our clients in an investment strategy based on expertise and mutual trust, we can mitigate risk and achieve our mutual goals. Trust Deeds are one of the safest high-yield investments available if you follow a few basic rules:

1. Don’t invest in trust deeds if you need your money at a time certain. Even the best of borrowers can occasionally be slow or late with payments.
2. Don’t invest in trust deeds if you are not willing to acquire the property for your own portfolio or cannot accept that you may have to sell in the event you acquire the property in a foreclosure.
3. Unless you are extremely comfortable with your broker, use the title company to deposit your funds and demand to be paid off through the title company when the borrower pays off the loan. This strategy will keep a broker who may be experiencing financial challenges from “borrowing” your money. In over 50 years of managing hard money loans, this abusive “borrowing” of the investors’ money accounts for the majority of outright losses. Click here for an example of Instructions to the Title Company.
4. Demand that all paperwork be in your name. Your vesting and percentage must appear on the deed of trust, the note, the fire insurance policy and the title policy. It is perfectly acceptable to buy part of a loan as long as your vesting is clearly noted along with the percentage of ownership.
5. Be aware that appraisals do not impart value to a property. Appraisers do not, with rare exceptions, buy property.
   
   So how do you, as an investor, protect yourself and the value of your investment?  Get an appraisal! Yes, get an appraisal – it has great information that can be extremely important. An appraisal includes pictures, the size of the lot, the type of improvements, zoning, the best use of the property, age and condition of the property, and ample amounts of other useful information. It will also tell you what the appraiser thinks the property is worth based on comparable properties, the replacement value, and the income approach.
   
   All that being said, the property is worth what the appraiser says it is worth, or the purchase/sales price (whichever is less), with reasonable adjustments. I would be happy to meet with any potential investors to outline the many ways I personally determine a property’s value.
6. Never, under any circumstances, invest money in a second or more junior position. It really does not matter what the loan-to-value (LTV) is, or how small the first trust deed is ahead of you, don’t do it! Even if you believe that if the loan goes bad you will have the funds to pay off the first, don’t do it! Circumstances change and your cash position may be different at the moment of truth.
7. Be aware you may have to come up with revenue to keep your investment from deteriorating. For example, an REO property may require cash calls to pay expenses (e.g. property taxes) for an interim period until you can realize the outcome of your investment.
8. Adjust with the market! The market is still in a state of flux. With our many contacts in the field we stay ahead of the curve on these changes. The commercial property and high-end home markets are being watched closely at this time.

Having provided all the pitfalls and negatives, you should not lose your money in trust deeds. Let’s recap:

1. Keep your money in the bank if you need it.
2. You may end up owning the property.
3. Keep your broker honest; use the title company.
4. Demand paperwork in your name.
5. Understand how value is determined.
6. Invest in first trust deeds only.
7. Be aware of the occasional requirement for the temporary investment of additional funds.
8. Adjust with the market.