States that permit the use of trust deeds as home loans security are known as trust deed states and such states allow the trustee to foreclose on homes whose owners have defaulted on their loans and to convey (transfer) the title to the new owner.
The trustee in this case is a third party whose responsibility is to keep the deed to the property on behalf of the lender until the loan is paid in full.
The trustee deed also permits for the foreclosure of a home without involving the judiciary or heading to court. Instead, a trustee can execute a foreclosure by offering the property for sale through a trustee’s sale. Once the property is sold, the property’s title is conveyed to the new owner by the current trustee through a trustee deed.
Another unique feature of a trustee deed is that once a property is successfully foreclosed the trustee is obligated to pay the lender and the borrower if the funds allow. The lender is paid the outstanding loan amount while the borrower receives any remaining amount after the lender has been fully compensated.
How to invest in trust deeds
Investing in trust deeds basically entails lending money to property developers who cannot get loans from other financial institutions such as banks. Such deals are usually facilitated by brokers of trust deeds and usually involve putting down the investor’s name as the beneficiary in the trust deed. Once the deal is completed the broker typically acts as the trustee and the investor is set up to reap significant returns given that such loans usually have high interest rates because of their inherent risky nature.
A major disadvantage of investing in trust deeds is that such investments are quite illiquid, which means that the investor’s funds will be tied up for a while. It is also unlikely that such loans could generate any capital gains as the only benefit of this investing method is the interest payments on the loan. Some of the individuals involved in such ventures might insert, or identify irregularities in the way the trust deed was created or worded, which could lead to costly legal battles with a negative impact on the investment. Such investments are not suitable to inexperienced investors as you need to have a certain level of investing expertise in order to select the best investments in this high-risk investing niche.
Comparison between a mortgage and a trust deed
One of the main differences between a mortgage and a trust deed is that a mortgage typically strictly involves two parties, which are the lender (the mortgagee) and the borrower (the mortgagor). On the other hand, a trustee deed always involves three parties, which are the lender who is also referred to as the beneficiary and the borrower also known as the trustor and a trustee, which is usually an escrow company, a title company, or a bank.
The foreclosure process for a mortgage differs significantly from that for a trust deed as mortgage foreclosures are supervised by the courts, hence, they’re called judicial foreclosures. They are usually quite expensive and take a long time for the lawsuit to be decided. On the other hand, the foreclosure of a trust deed home loan does not involves the courts and is thus known as non-judicial foreclosure. The process is usually conducted through a trustee sale and is quite fast.
Another major difference between the two types of foreclosures is that in a mortgage foreclosure the borrower maintains his right of redemption, which allows him to repay his mortgage and claim the title to his property even after the home is sold. This is different from a trust deed foreclosure where the borrower does not have a right of redemption once the home has been sold in order to recover the secured loan. If there no buyers make an offer at the trustee sale, the lender will become the owner.
A word of caution
Beware of homes sold via a deed of trust foreclosure as they could bring you a lot of problems. Firstly, when you buy a trust deed home you become the new owner of the property immediately and assume responsibility for all the defects on the property. There are no warranties in a trust deed that the property does not have any encumbrances, which means that as a new owner you are directly liable for any claims that exist against the property. This applies to any new owner even if he/she was unaware of the liens when purchasing the property. Therefore, it is vital that you do your own due diligence before purchasing such properties.
Title insurance
You should always obtain title insurance when you are purchasing property through a trust deed in order to ensure that there are no claims against the property and that the title is clean. Paying for this service will ensure that you do not purchase property that has liens against it or is loaded with other encumbrances.
