An important item to have when considering a real estate investment as a private investor is a first trust deed. This will take priority and have less risk than second trust deeds. Since first trust deeds are recorded first they must be settled first by the holder of the deed. When there is a first and second deed trust, if the situation comes to claim the property for non-payment and there is not enough money to satisfy both, the second trust deed holder will not be paid.
Private real estate investing with trust deeds may offer high returns and low risk. While the function of a trust deed may seem similar in function to traditional mortgages and double-digit returns on trust deed investments sound tempting, the smart private investor will require a due diligence report on any potential trust deed investments. Remember that trust deeds involve three parties: a borrower, a lender and a trustee. That third party will hold legal title to the property until the borrower has paid the lender in full. Should the borrower default on the loan, the lender is able to take possession of the property. Investors will loan money direction for a trust deed or by purchasing an existing promissory note.
If investors purchase 100 percent of a single trust they will have full ownership of the note. However they must have the capital to finance an entire loan amount when interested in purchasing whole trust deeds. This is when private investors without that capital may turn to hard money lenders for funding.
When multiple investors contribute funds to purchase interests in a trust deed, a single investor doesn’t pay the entire sum. While this method may be preferred for those with less money to invest, there can be complications if the borrower defaults on how to proceed with taking repossession. When an investor has a fraction of a trust deed, they may not have possession of original documents which can present problems later on.
When private real estate investing, an investor should request a Preliminary Title Report and exam it for any facts that may affect the market value of the property in question. Items of concern would be a large difference in the assessed value and the appraised value of the property or any unexplained legal issues. These are things that will make it difficult when an investor with a promissory note needs to recover the investment in case of foreclosure.