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If you are considering investing in a turnkey real estate development secured by real estate, one of the main items on your due diligence checklist should be determining which mortgage theory the state follows based on location. of the property in question. This understanding can be detrimental to your recovery strategy if your borrower is unable to meet their end of the deal and defaults on the loan. Each state adheres to either the title theory or the privilege theory, although a few states follow both. In Title Theory States, trust deeds are the binding agreements used between lenders and borrowers, and mortgages are the agreements used in Lien Theory States. Both documents serve the same purpose in a real estate transaction between a lender and a borrower, but how they affect the relationship between the parties involved and the property in question is what makes the big difference.
What are the Similarities Between Trust Deeds and Mortgages?
Mortgages and trust deeds both secure repayment of the loan by placing a lien on the property and are considered by law to be proof of debt as they are usually registered in the county where the property is located. If the borrower does not repay the loan and the lien is first, the lien gives the lender the right to repossess the property by foreclosure and sell it. In other words, mortgage documents and trust deeds are used as leverage to ensure that the borrower repays the loan in full. The ability to sell the property gives real estate investors and lenders the ability to recoup the original loan principle. Depending on the value of the property, there is the potential to recoup late interest, late fees, and even capital gains.
What are the main differences between trust deeds and mortgages?
Number of Parties
A mortgage involves two parties: a borrower (the mortgagor) and a lender or investor (the mortgagee). A trust deed involves three parties: a borrower (the Trustee), a lender or investor (the Beneficiary) and the title company or escrow company (the Trustee). The primary functions of the trustees are to hold title to the lien for the benefit of the beneficiary and to initiate and complete the foreclosure process for the beneficiary in the event of default of the trustee.
Title deed and foreclosure process
The main difference between the trust deed and mortgages is who owns the title to the property encumbered by the loan for the duration of the loan. In a mortgage state, the borrower holds title to the property. Therefore, if the borrower defaults on the loan, the lender must go through the courts to repossess the property through foreclosure. This is called judicial foreclosure and this process involves the lender taking legal action against the borrower. This can be a costly and time consuming process for both parties involved.
In a trust deed state, the court can be bypassed because the trustee holds title to the property. You would go through the non-judicial foreclosure process, which almost always results in faster execution and resolution for all parties involved, especially the lender. The speed of foreclosure can be detrimental to minimizing costs of ownership and getting the property to market quickly for sale in what may be a more promising market than that encountered at a later date.
What are the first trust deeds?
As this implies, a first trust deed is registered before any other financial lien on the property in question, be it secondary mortgages, trust deeds or even mechanical liens placed by subcontractors. This means that the First Trust Deed holds a priority or “senior” position, making all other privileges encumbered by the loan subordinate or “junior” to the principal loan. Obtaining the top position is important because in a foreclosure scenario all outstanding subordinate liens are eliminated. This allows the lender not to have to worry about reconciling these other debts in addition to theirs.
Why invest in trust deeds?
Hard money lenders, like Ignite Funding, tend to lend more in Trust Deed states. Trust Deed Investments provide an attractive return with relatively low risk for Ignite Funding investors due to their privileged position on the property and the foreclosure process which is more conducive to investors who are the loan recipients. This allows investors to earn double-digit annualized returns paid as monthly fixed income with real estate as collateral.
If you are interested in becoming an investor in a trust deed or would like to know more, text the word “Investments” to 844.552.7022 or you can CLICK HERE to schedule a FREE consultation at your convenience.
Ignite Funding, LLC | 2140 E. Pebble Road, Suite 160, Las Vegas, NV 89123 | 702.739.9053 | T 877.739.9094 | F 702.922.6700 | NVMBL # 311 | AZ CMB-0932150 | Money invested through a mortgage broker is not guaranteed to earn interest and is not insured. Before investing, investors should receive the applicable disclosure documents.