Property can be bought and sold under a number of different legal arrangements. When you purchased your house, you obtained a mortgage through your bank. Mortgages are pretty typical in the U.S. In commercial real estate investing, however, mortgages don’t work. Investors often turn to hard money lenders who utilize trust deed arrangements.
The Basics of Hard Money
Hard money lenders are private lenders whose business is asset-based lending. A real estate investor might approach a hard money lender like Salt Lake City’s Actium Partners in hopes of financing an office building acquisition.
Actium Partners would make its approval decision based on the value of the property. As long as the value is there, the borrower can put up the necessary down payment, and everything is in order with the title, things quickly proceed through approval, underwriting, and funding.
Because the loan is asset-based, the borrower actually puts up the property as collateral. This is where the trust deed arrangement comes in. Without a traditional mortgage collateralizing the loan, the lender needs something else to protect its interests. A trust deed arrangement provides exactly that.
How Trust Deeds Work
The trust deed arrangement is one in which the property’s title is turned over to a third-party. The third party holds the title until the loan is paid off. In the interim, the borrower still has access to, and control over, they acquired property.
There are at least three parties to every trust deed arrangement:
- Trustor (the borrower)
- Trustee (usually a title company)
- Beneficiary (the lender)
A trust deed is created along with loan paperwork. What does the deed do? It essentially creates a secured lien on the property in question. It officially establishes the property as collateral for the loan.
Along with the trust deed is the promissory note. This is a legal document that serves as recognition of the debt. It is so named because its language is a promise by the borrower to repay his loan.
The trust deed is recorded with the county recorder’s office along with other records pertaining to the property transaction. Once recorded, it puts all parties on notice of the property lean. Should the borrower default, the lender can exercise its legal right to recover its investment.
Why Lenders Appreciate Them
Lenders appreciate trust deed arrangements for a couple of reasons. First, they are a lot simpler to arrange compared to mortgages. They contribute to a more streamlined underwriting process that makes approving and funding hard money loans fast.
Second, and perhaps more importantly, a trust indeed gives a lender faster access to the property in the event of default. Under a typical mortgage scenario, it could take a year or more for a lender to exercise its rights against a defaulting borrower. But under a trust deed arrangement, the lender’s rights can be exercised almost immediately.
Why They Are Good for Borrowers
Even though trust deed arrangements are less favorable to borrowers forced into default, they are still good for borrowers nonetheless. Trust deed arrangements give lenders the ability to take on loans that banks won’t touch. The trust deed concept is a contributing factor to the ease at which borrowers can get hard money loans.
The third party in all of this is the party holding the trust deed. It is usually the title company involved in the actual sale. The title company is compensated for its services by way of a flat fee. If all goes as planned, the loan is paid off and the deed on the property is ultimately transferred to the borrower.