Performing Due Diligence before Trust Deed Investing

The most important part of making an investment decision does not involve deciding how much money to put into it, finding out what the return could be or determining what income it will throw off. The most important part of making all of your investment decisions is due diligence.

Due diligence is the process of thoroughly evaluating and examining the vehicle you are about to invest in. Not just kicking the tires, dreaming of fantastic returns and looking at performance history, but actually getting to know all the moving parts involved and vetting them to make sure they are above board and that you understand all aspects of every transaction.

Questions to Ask Your Trust Deed Investment Company – TDIC

These are some of the questions you should ask your TDIC before you decide to use them to invest in trust deeds.

Who pays all the costs associated with underwriting, documentation loan servicing?

As a trust deed investor, you should not have any charges to pay out of pocket outside of the cost your bank charges to wire your funds to a closing agent. Instead, the borrower should be responsible for these expenses. Unlike other investments like mutual funds and stocks, there are no fees to the investor in a trust deed.

How are borrowers screened?

Trust deed underwriting is handled a little differently than the underwriting for conventional loans, but that doesn’t mean there aren’t set standards. In a trust deed transaction, a borrower’s credentials should be carefully reviewed; all of their liquid and hard assets should be considered and any opportunity for cross-collateralization with other real estate also taken into consideration. Perhaps the biggest factor in trust deed underwriting, however, is the loan to value ratio, since that really protects the investor against an unacceptable risk.

Whose name is on the trust deed?

The note, title policy and trust deed should always be in the name of the investor. Additionally, all insurance policies veering the property and other documents should be recorded or assigned in the investor’s name.

Who receives the invested funds (i.e. your money)?

As an investor, you should not give money to your TDIC. Instead, your investment funds should be wired directly to the insuring title company.

How will copies of the documents be sent to you?

In order to protect against any leaks of private information, the final underwriting package should be delivered to you via email as a link to a secure server. The actual documents should never be attached to the email.

Does a title company ensure that the title is clear?

Your TDIC should have every deed processed through an escrow/title company and they should include a title policy. Prior to the closing, your title insurer can protect your interest through the issuance of “binders” and “commitments.” A binder is an agreement to issue insurance giving temporary coverage until a formal policy is issued. A commitment is a title insurer’s contractual obligation to insure title to real property once the stated requirements have been met.

Will the property be covered by the appropriate insurance?

Your TDIC should ensure that there is always a fire insurance policy on the property and that flood, liability and construction insurance are purchased when applicable.

Will property taxes be paid?

The TDIC needs to ensure that the property taxes are current both at the time of funding and as they become due each year.

Will the property I invest in offer a safe environment?

While not always required, your TDIC should be willing to arrange an Environmental Site Assessment when necessary. This assessment should screen the property for:

  • Any toxic substances
  • The presence of asbestos
  • The former use of lead-based paint

The due diligence required in trust deed investing is no different than that of traditional investments. Investors must review, analyze and understand trust deed investments as they would an IPO, REIT, mutual fund or any other position in their portfolio and because of the flexible nature of trust deed investing, your due diligence can also help you structure a deal that includes all the personalized elements you need to ensure your financial future.

By familiarizing yourself with every aspect of the trust deeds investing process you become an informed investor insulated from the many risks felt by investors who make uninformed, rushed decisions as they are lured by the promise of high rates of return.

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