Good Investing Information from Noble Capital, Austin, Texas
Trust deed investing is a process by which an investor becomes a lender by funding a note secured by real estate. More specifically, the note is a contract for the lender to lend money and in return the borrower promises to repay the loan plus interest at a certain rate over a prescribed period of time until the entire loan and interest is repaid. The document evidencing this promise to repay is known as a Promissory Note. The Promissory Note is secured by a Deed of Trust, which is recorded against the title of the borrower’s property (collateral). In the event the borrower defaults on his promise to repay the loan, the Deed of Trust provides the lender with a means to sell the property (foreclose) to satisfy the borrower’s obligations. As in all investments there is a risk in Trust Deed investing, but those risks can be mitigated by understanding where potential pitfalls could occur, including:
1. Was the appraisal of the property completed by a reliable appraiser? The appraisal should be done under the direction of the loan originator.
2. Does the property type or geographical market in which it resides present undue volatility?
3. Has a title report been prepared and reviewed?
4. How does the loan amount compare to the appraised property value? The lower the loan to value ratio, the more secure the investment.
5. Is the loan junior (subordinate) to another loan or lien on the property? Other than tax liens, investors should be very cautious taking a position behind another lien holder.
6. How long is the term of the loan? The longer the term, the more difficult it is to predict what collateral value might be in the future.
7. Is the property readily salable at the loan amount or greater in the event of a default?
8. Has a credit check been completed on the borrower? Since trust deed investing often involves borrowers with credit or timing issues, the lender should understand the borrower’s track record, financial position and general creditworthiness.
9. Are the documents evidencing and securing the loan in order?
10. Are the escrow instructions consistent with lender’s understanding of the transaction?
11. Has a servicing agreement been completed? A reputable servicing agent will save most problems and a clear, documented understanding of how the loan will be serviced should be in place, how proceeds will be distributed and the fee (if any) should be defined.
12. In the event of a default by the borrower and a subsequent sale of the collateral, how will sale proceeds be distributed?
Notwithstanding the above, trust deed investing can be very rewarding. The interest rates a borrower pays to a private lender are significantly higher than one would expect to pay a traditional lender. Interest rates increase as the inherent risks involved with loan repayment increase. Servicing of a trust deed loan can be easily delegated to a reputable servicing agent and in some cases, distributions can accrue and compound rather than be disbursed on a monthly basis. This feature becomes particularly attractive when the investments reside within a self-directed retirement account such as an IRA, Keogh or 401K. Significant leverage can be created if scheduled distributions are reinvested and allowed to compound at a high interest rate within a retirement account without incurring taxes until funds are withdrawn. Trust deed investment yields remain consistent under all market conditions, the risks are manageable and the day to day management obligations can be easily delegated to a reputable servicing agent.
Trust deed investments, when professionally underwritten and managed; provide a significant hedge against the performance of more traditional types of investments during declining market cycles. As a result, trust deed investments can provide attractive returns and significant diversity to a well rounded investment portfolio.
http://noblecapital.com/
