A trust deed is a legal instrument used to secure a loan. It transfers the legal title to real property to a third party, called a trustee, who holds the property as security for the loan. However, a trust deed is not just a financial tool. It can be used for many purposes, including ensuring the transfer of property to the correct beneficiaries.
A trust deed is commonly used to finance real estate purchases, especially in California. In this type of arrangement, the borrower transfers the title to the property to a trustee, usually a title company. The trustee holds the title for the borrower as security, and when the loan is paid off, the title is returned to the borrower. If the borrower defaults on the loan, the trustee has the power to foreclose on the property and sell it in a nonjudicial foreclosure.
In some states, trust deeds aren’t required to be recorded in court. However, in California, a lender must record a Notice of Default. This notice explains the circumstances in which a trustee can foreclose on a property. If the loaned property is not repaid within 90 days, the trustee can sell the property. During this process, the lender and borrower must resolve any outstanding debts before the property is sold. This process is faster than judicial foreclosure and provides a safer environment for trust deed investment.
Whether a trust deed is right for you depends on your current situation. If you are struggling to make ends meet, you can consider bankruptcy as an alternative. The law also requires that you must have sufficient disposable income to pay for the debts you owe. In addition, it is important to consider the costs involved in obtaining a trust deed.
While direct real estate investment can be risky, a trust deed investment has a high margin of safety and a low loan-to-value ratio that protects the lender. Banks have been reluctant to make trust deed loans as a result of the recent credit crisis, but the current yield of trust deed investments is higher than the yield provided by direct real estate investments.
Before investing in a trust deed, it is recommended to consult a real estate attorney in your state. A real estate attorney will be able to advise you on the legal implications of a trust deed and help you avoid any costly mistakes. A good lawyer will assist you in negotiating with the borrower and ensuring that you get the most favorable terms.
For residential and commercial trust deeds, you should consider an LTV below 60% of the value of the property. This is a general rule of thumb, but it is important to remember that an LTV that is higher than 60% can increase the risk of losing your money.