Practical Tips for Investors
Are you exploring the realm of trust deed investments? Here are guidelines to ensure a mutually beneficial outcome for all parties involved.
Collaborate with Licensed Brokers: Engage only with licensed brokers who specialize in whole and fractional trust deeds.
Prioritize Title Insurance: Work exclusively with reputable title and escrow companies to maximize the security of your investment.
Obtain Written Approval: Never make loan extensions, modifications, or other changes without obtaining written approval from junior lien holders.
Independently Evaluate Property Value: Formulate your opinion on the property's value using diverse approaches, including closed sales, tax assessors' opinions, and potential income, in addition to relying on appraisals.
Optimal Loan-to-Value Ratio (LTV): Stick to industry norms, aiming for a typical LTV range of 65% to a maximum of 75%. Second trust deeds should always have a lower Combined Loan-to-Value (CLTV).
Escrow Insurance Premium Payment: Ensure a secure investment by requiring the purchase and prepayment of 12 months' fire insurance premium in escrow. Opt for insurance with a low deductible after evaluating the subject claim's history.
Maintain Cash Reserves: If considering a junior loan, maintain sufficient cash reserves to cover 6 to 12 months of payments on loans ahead of your junior loan.
Notification of Default: Stay informed about potential issues with senior loans by filing a "Request for Notice of Default" when funding junior loans.
Understand First Mortgage Terms: When making a junior loan, have a clear understanding of the terms, balance, and status of the first mortgage.
Require HOA Certification: Prioritize Homeowners Association (HOA) certification, analyzing reserves and past case claim histories.
Avoid Second Trust Deeds on Raw Land: Steer clear of funding second trust deeds on raw land due to the lack of rental income and potential additional expenses in case of foreclosure.
Maintain Good Relations: Ensure borrowers know you are available, stay updated on changes in mailing addresses, and other contact information.
Send Balloon Payment Notices: Provide a 90-day notice of the balloon payment well in advance to all borrowers.
Consider Personal Guarantees for Corporations: Opt for personal guarantees for corporations, or alternatively, consider a lower LTV to compensate for added risk.
Explore Tax Service Options: Decide if you want a tax service to notify you of any back taxes on the property securing your investment.
Trust Your Instincts: After considering all tips, trust your instincts. If everything aligns with the guidelines, your trust deed investment is likely secure.
Invest wisely and prioritize the preservation of capital to safeguard your financial interests.