Trust Deed Investors Must Clean Up Foreclosed Property

If you are going to invest in trust deeds, and you are seeking more than 7% in yield, you will almost certainly have to foreclose on some property from time to time. The reason why is because the least risky borrowers are not going to pay 10% to 14% interest; therefore most of the loans that you will make will be made to sub-prime borrowers. Foreclosures happen.

If you ever do foreclose on a property, be sure to remember this very important rule. A foreclosed property will never sell or lease until it is renovated.

When a borrower is losing his property in foreclosure, he almost always allows the property to fall into disrepair. After all, why would he maintain a property that he is poised to lose? Why not use the money to bring his payments current or to pay his personal bills? Therefore almost all foreclosures need a substantial amount of work.

Don't neglect this work! Over the past 30 years Blackburne & Brown has tried to sell several hundred foreclosures. Time after time we have watched foreclosures sit vacant and unsold for years and years ... until we renovated them. And within 90 days of renovation, these properties almost always leased or sold.

So remember this rule: A foreclosed property will never sell or lease until it is renovated. A wise hard money broker will therefore, immediately upon foreclosure, assess his investors for about 18% of the value of the foreclosed property and start the renovation process immediately. If a foreclosed property is immediately renovated, it should sell or lease within just a few months.

So don't freak out if a loan in which you are invested goes into foreclosure. Just push-push-push your hard money broker to immediately start the renovation process.

If you are an accredited California investor and you would like more information about investing in trust deeds, please click here.

Trust Deed Investments and Junior Financing

Banks usually will not allow the seller of a piece of commercial real estate to carry back a second trust deed behind their new first mortgage. They want the buyer to put down a full 25% to 30%.

Sometimes good buyers don't have the full 25% to put down. This is a good opportunity for a private trust deed investor to make a first trust deed. A private money first trust deed loan will be more expensive than a loan from the bank, but a private lender will often allow the seller to carry back a second mortgage.

The bank's loss is the private investor's gain.

If you are an accredited California investor and you would like more information about investing in trust deeds, please click here.

Difference Between a Trust Deed and a Mortgage

All else being equal, it's safer to invest in a trust deed than a mortgage. An investor can usually foreclose on a trust deed much faster than a mortgage.

In a mortgage, there are two parties. The borrower is the mortgagor because he's the grantor of the mortgage deed. Note the similarity of the two words - mortgagor and grantor. They both end in "or". The lender is the mortgagee. The mortgagee is the grantee of the mortgage deed; i.e., the lender is the receiver of the grant of the mortgage deed.

Mortgages can take six months to several years to foreclose because the lender has to involve the courts, and court calendars can get swamped.

In contrast, a deed of trust involves three parties, rather than two. The trustor (the grantor of the deed of trust) is the borrower. The trustee is a neutral party, like a title company or an attorney. The trustee receives the grant of bare legal title while the loan remains outstanding. The final party is the beneficiary of the trust; i.e., the lender.

The borrower (grantor) conveys bare legal title to the property to the trustee for the benefit of the lender (beneficiary). Basically the deed of trust says that the trustee will hold onto the title to the property until the loan is either repaid or until the property is sold in a foreclosure sale for the benefit of the lender.

Now here is the key thing about trust deeds. The lender does not have to involve the courts in order to foreclose. The lender merely notifies the trustee of a default on the promissory note, and the trustee starts the foreclosure process privately (without involving the courts). As a result, it is very easy to foreclosure a trust deed in less than five months.

The sooner a lender forecloses, the sooner he can protect the property from waste or vandalism. While many mortgage investments can be excellent investments, all things being equal, a trust deed is better.

If you are an accredited California investor and you would like more information about investing in trust deeds, please click here.

What is a Trust Deed Investment?

When a bank makes a first mortgage on a borrower's house or office building, it usually secures the loan with a deed of trust or a trust deed (same thing). A trust deed is very similar to a mortgage, except the lender can foreclose on a trust deed without going to court. This makes the foreclosure faster. If the borrower doesn't make his loan payments, the bank can foreclose on the property.

Private investors are also allowed to loan money, as long as the interest rate is not usurious (sorry, Tony Soprano). These private investors are absolutely allowed to secure their loans with a trust deed (mortgage) against the borrower's property. If the borrower doesn't make his payments, the private investor can foreclose on the property, just like a bank.

Many, many private investors in California reguarly make loans secured by trust deeds (mortgages). It's a billion dollar industry. Assuming the loans pay as agreed (investing in trust deeds involves substantial risk), the investors typically earn between 10% to 12% interest.

If you are an accredited California investor and you would like more information about investing in trust deeds, please click here.