Sunday, March 25, 2007

Trusting Trust deeds?

What are trust deeds? They are deeds which are basically mortgages. However these deeds do not transfer the property to a buyer. Instead the trust deed transfers the title of a piece of property to a "trustee", usually a title company or trust. This deed is held as security for the loan by the borrower. When the loan is paid, the deed is transferred back to the borrower. However if the borrower defaults the trustee can sell the property.

Sounds great? And people who get these sort of loans often are paying you the "trustee" 10-15% interest for a specified amount of time say 5-10 years. This sounds like a good deal with minimal risks right?

Wrong. With every investment, there is not guaranteed return. Much less something not well advertised or publisized.

One major issue with these types of loans is that people who get these loans usually are unable to finance properties through a normal bank. They have bad credit, poor risk, etc. Also these loans are locked in for a set amount of time, and often these borrowers are more likely to default during this period. So the risk is that you won't be paid back.

Of course you'd respond but you have a property deed in security. But the property when sold is only worth what someone else is willing to pay you. If you sell the property, typically it's run down or raw land, and the borrower was using the money to develop the property. That means it can be very difficult to sell the property for what you "mortgaged" it for.

So even selling the property may not net you back what you loaned out. Is it a legitimate way to make money? Yes. Does it have high returns? Yes. Should it be in a person's portfolio? Maybe, afterall diversification is important. But should it be the only thing in a person's portfolio? No. This is just perhaps one component of the Real Estate portion of a person's portfolio.

My post though negative sounding is not meant to be. I'm considering trust deeds, but realize it will only happen after I have substantial assets and are able to should the loss of the money. And that it is only a small fraction of our overall net worth, and not a large portion of the basis.

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