While true stories abound of trust deed investors who have been quite successful, there are also those who lost nearly everything as a result of too little investigating or inquiring into the investment. The high rates of return offered by trust deeds can be alluring, but that doesn’t mean they shouldn’t be thoroughly vetted as you would any other investment. In addition to vetting this financial instrument, investors should also learn everything they can about their rights.
As an investor there are certain rights that you enjoy and in order to exercise them and ensure they are recognized, you need to be familiar with them. It can be difficult to understand where your rights begin and end and what constitutes a reasonable request for documentation, loan restrictions or conditions. Here is an overview of each of your rights. As you can see, they exist to make sure you enter into a secure transaction that you are completely comfortable with.
The Right to Favorable Terms
Your investment has many different terms. You have the loan-to-value ratio to consider, the length of the loan term and the interest rate paid by the borrower; you have conditions that are individual to every lending company and deal structured and you have restrictions that may be imposed by a particular property type. When you are considering each of these factors individually and then collectively as they make up the loan, you have the right to only move forward if the agreement offers those terms that you think are most favorable to you. You have no obligation to move forward if you think that you can find better terms with another borrower or trust deed arrangement.
The Right to Due Diligence
No one should have to enter into a trust deed agreement while rushed or unable to explore all the different facets of the loan. Your questions and concerns should not be brushed off or left unaddressed. You have the right to do your due diligence and the right to get answers to your questions as part of a transparent transaction.
Documentation of Borrower Income
Investments may be speculative instruments, but the speculation shouldn’t be the same as that of someone panning for gold in a silver stream. Your trust deed investment should be made to a borrower with the ability or capacity to make payments as well as the desire to make the payments. Consider the income history of the borrower, his or her industry of employment and potential job stability, his or her assets and any other debts they must make payments on when determining whether or not the borrower has the ability or capacity to pay back the loan. Both Federal and State consumer protection laws may restrict or prohibit certain loan terms and place increased responsibilities on both brokers and lenders, such as primary residences for which it is illegal to make a loan to someone who does not demonstrate the ability or capacity to make payments.
The Right to Speak to the Borrower…or Not
As the investor, you have the right to speak to and/or meet the borrower and inspect the property securing the note. Conversely, you also have the right not to speak to or meet with the borrower or inspect the property.
The Right to Value Determination
Before you agree to loan the borrower money for a property, you have the right to have an appraiser look at the property and give an unbiased assessment of its value. You do not have to take the borrower’s word for it or their personal determination of its value. In addition, if you think that an appraiser’s valuation is inflated, overly-optimistic, or inaccurate then you have the right to reject the valuation. Remember, it’s your investment money—you do not have to let them go toward anything you aren’t completely comfortable with.
The Right to Determine Marketability of the Property
It doesn’t matter what the property appraiser says or the borrower thinks—as the investor you have the right to turn down a loan to any property that you think will not be marketable in the future or that could be difficult to sell in the event of a foreclosure.
The Right to a Prepayment Penalty
Most trust deed investments have a lifespan of 6 months to two years. If you want to ensure that you have a minimum number of months or years with the investment, you have the right to request that a prepayment penalty be added to the loan. If the borrower asks for a waiver of the prepayment penalty, you have the right to add additional points to the loan if you decide to comply with the request. In some instances (primary residence), a prepayment penalty may not be added to the loan.
The Right to Interest Reserve
In some trust deed investments, the borrower may not have the ability to make payments. Under these circumstances it may be appropriate to build into the loan an amount from which payments can be drawn. This is called an interest reserve, and occurs when a portion of the loan at funding is held back, generally placed into a trust account and as each payment is due, it is paid from the reserve.
The Right to Additional Documentation
Documentation requirements vary depending on property type and whether or not the property is considered an investment property or an owner occupied business. You have the right to require additional documentation such as resumes for all principals, environmental reports, photos, old appraisals, additional operating history, letters of explanation, aging reports, etc.
The Right to Limit Paid Commissions
The initial payment of commission will be paid with your initial investment. If you wish, you can limit the number of points that are paid to the broker as their commission.
The Right to Third Party Service and Assignment
You have the right to use a specific third part escrow company, appraiser or title company rather than those that are arranged through the loan. You can also use a separate trustee.
Right to Cancel
If you ask for certain materials—like documents—or if you ask for certain conditions that are not acted on by the broker or borrower, you have the right to cancel the loan.
Remember it’s your money and your investment — you do not have to invest in anything you aren’t completely comfortable with!