FREQUENTLY ASKED QUESTIONS
What is a Trust Deed?
A Trust Deed is a document recorded with a county recorder’s office creating a secured lien on real property which provides collateral for lenders and trust deed holders. Some states use a Mortgage instrument rather than a Trust Deed.
How does it work?
A borrower who owns or wants to own real estate needs a loan. The borrower executes a Promissory Note wherein the borrower promises to repay the lender. The recorded Trust Deed creates the secured interest attached to the borrower’s real property. If the borrower does not pay as promised, the Lender/Trust Deed Investor can look to the real property for repayment and/or recovery of his invested capital.
Why would an Investor get involved?
A Trust Deed investment occurs when an investor purchases all or part of the Note and Deed of Trust. The Investor can earn a 7.5% to 9.0% or more annualized yield and receive monthly interest payments.
What are the benefits of Trust Deed Investing?
Investors enjoy monthly interest payments on their invested capital. Yields are higher compared to other fixed income securities. Real estate collateral is often viewed as more tangible than stocks and equity investments. Mortgage Funds which specialize in this type of investment arrange the transaction, collect and distribute monthly payments, and handle most problems that may arise, through the payoff of the loan.
How do yields compare to other investments?
Investment securities backed by the federal government (and depending on maturity) yield less than 1% to between 2% and 3%. Municipal bonds from state and local governments can provide somewhat higher yields, but still typically less than 5%. Trust Deed mortgage investments currently yield from 7.5% to 9.0% or more annually with the return paid via monthly interest payments.
Should I invest in one Trust Deed or in a pool of several Trust Deeds?
We believe investing in a fund such as Fortunato allows for significant diversification benefits while still maintaining an attractive yield. We believe the long-term, risk-adjusted return of an investment in Fortunato would be superior to the return of investing in independent Trust Deeds. Fortunato offers diversification as its loans are extended to various property types, property locations, loan-to-value ratios, and maturity dates.
How do I find a reputable Mortgage Company who specializes in Trust Deed Investments?
Find a company that has a substantial track record of providing these types of investments. One can usually research the company online. For example, for companies operating in California one can access the website for the California Dept. of Real Estate (www.dre.ca.gov). On this site one can check to see if the company has an active license or any consumer complaints against it.
From a borrower’s perspective, why would a borrower be willing to pay higher rates when bank loans seem to offer lower interest rates?
There are many reasons borrowers request private money loans. A few reasons include:
- Borrower needs the money quickly
- Borrower only needs the funds for a short period of time, matching the short maturity nature (typically 12 to 24 months) of private money loans
- Borrower has minor credit problems
- Borrower needs to pay judgments and liens such as Federal or State taxes
- The property to be used to secure the loan may have some issues that make it difficult to obtain a bank loan
I have heard of First and Second Trust Deed Investments. What is the difference?
The difference between a First and Second Trust Deed is the priority of the lien based on the date the Trust Deed is recorded. The earlier recording date would have priority (i.e. first position). If you have a Second Trust Deed and the Borrower fails to pay the First, you would be responsible to make the First Trust Deed payments or suffer the risk of being foreclosed out and losing your invested capital.
What should I look for when evaluating a property for a Trust Deed Investment?
The type of property is the first item to consider. Fortunato suggests that Investors choose mainstream real estate properties in Metropolitan Service Areas “MSAs” where there is a known resale market. This would include properties such as: homes, apartments, commercial and industrial buildings, churches, and land. Fortunato would avoid special purpose properties such as water parks, fish farms, health clubs, and rural properties. The provider of private money loan should always require an independent appraisal or Brokers Price Opinion (BPO) of the property.
Another issue to consider is the percentage relationship between the mortgage loan amount and the value of the real estate to be pledged as security, known as the Loan-to-Value (LTV) Ratio. For example:
Value of property = $800,000
Loan amount = $500,000
LTV = 62.5%
The LTV is a measure of lending risk. The higher the LTV the greater the lending risk due to the reduced amount of equity cushion in the transaction.
Example: A single family home with 4 bedrooms and 2 ½ baths is valued at $425,000. If one were to extend a loan to 70% of value the loan amount would be $297,500. The difference between the value of the property and the loan would be $127,500. This is referred to as “protective equity” or “equity cushion.”
What Borrower considerations should you be concerned about when making a lending decision?
Fortunato is primarily a collateral-based lender and to a lesser degree a credit-based lender. In other words, we look first to the real estate collateral and second to the borrower’s credit to determine the likelihood of the borrower’s ability to repay the debt. We obtain an appraisal report, a credit application including financial statements, interview the borrower personally and then make our decision accordingly.
How is the loan servicing handled?
Fortunato acts as the Loan Servicing Agent for most all the loans that we offer to Investors. We handle everything from communicating with the borrowers to collecting the payments. We also monitor the status of property taxes and property insurance and issue demands for payoff statements and reconveyances once the loans are paid in full. We have approximately 30 years of experience in servicing loans which includes expertise in: slow paying accounts, bankruptcies, foreclosures, and liquidating real estate assets. We communicate regularly to ensure our investors are aware of the status of any loans that may not be paying as agreed and that we are carrying out our delegated responsibilities as requested.
OTHER RESOURCES TO LEARN ABOUT TRUST DEED INVESTING:
Trust Deed Investments – What You Should Know! Bureau of Real Estate, State of California http://www.dre.ca.gov/files/pdf/re35.pdf