Trust deed investing in California, briefly

A trust deed investment means an investor's capital funds a loan secured by California real property, with the investor named as beneficiary on the deed of trust. Hanover Mortgage Company arranges business purpose 1st, 2nd, and 3rd trust deeds for California resident investors only — Hanover Mortgage Company does not fund loans directly; capital comes from private investors, arranged under Hanover Mortgage Company's California DRE broker license.

SEC accreditation vs. California's suitability standard

Accreditation is a federal standard, not a California one. An individual generally qualifies by meeting one SEC test: net worth over $1 million (excluding primary residence), income over $200,000 individually or $300,000 jointly for two years, or an active Series 7, 65, or 82 license.

Source: U.S. Securities and Exchange Commission

But direct trust deed investments arranged through a California-licensed broker aren't generally structured as offerings that require SEC accreditation. Instead, the DRE applies an investor suitability standard under Business and Professions Code §10232.45 — a non-accredited California resident investor can invest as long as the broker determines it's suitable for their financial situation.

Why does accreditation matter for some real estate investments but not others?

Accreditation requirements come from the specific federal exemption an offering relies on. Under Regulation D, a Rule 506(b) offering can include a limited number of "sophisticated" non-accredited investors alongside accredited ones — but can't be publicly advertised. A Rule 506(c) offering can be advertised publicly but must limit participation to verified accredited investors only.

Real estate syndications and private funds typically rely on one of these exemptions, which is why accreditation gates access. A trust deed arranged directly by a California-licensed broker isn't structured the same way — it's a direct loan investment governed by DRE suitability rules rather than a Reg D securities offering, which is why the accreditation gate doesn't apply the same way here.

How is accreditation actually verified?

Self-attestation on a form is generally not sufficient for a Rule 506(c) offering. Common verification methods include a written confirmation from a registered broker-dealer, investment adviser, licensed attorney, or CPA; or direct review of tax returns, W-2s, or brokerage/bank statements. This is a separate process from California's RE 870 suitability questionnaire, which documents suitability for trust deed investing rather than SEC accreditation status.

The RE 870 Investor Questionnaire

California brokers document suitability with the RE 870 Investor Questionnaire, a California DRE form covering financial situation, liquidity needs, and trust deed experience. It's completed before a California resident investor's first investment and updated annually — required regardless of whether the investor also happens to meet SEC accreditation.

Source: California Department of Real Estate, RE 870

Whole vs. fractional trust deed investments

Hanover Mortgage Company arranges both structures for qualified California resident investors, evaluated case by case:

Multi-lender limit per Business and Professions Code §10238; LPDS requirement per California DRE regulations.

Trust deeds arranged through Hanover Mortgage Company can also be held in a self-directed IRA through a separate IRA custodian — Hanover Mortgage Company does not act as custodian. Confirm requirements with your custodian and tax advisor first.

What to check before investing

• Broker's license and track record — verify current status through the DRE license lookup
• Equity position (LTV) — the cushion protecting the investment if a borrower defaults
• Lien position — whether the investment is a 1st, 2nd, or 3rd trust deed, which determines repayment priority if the property is sold or foreclosed
• Borrower's exit strategy — how and when the loan is expected to be repaid
• Recovery process — California's non-judicial foreclosure process and realistic timeline, understood before investing, not after
• Title insurance and preliminary title report — confirming no undisclosed liens ahead of the investor's position

Framework informed by the DRE's own guide, "Trust Deed Investments – What You Should Know."

Trust deed investing carries real risk

Trust deed investments are not insured or guaranteed. Interest on trust deeds is not guaranteed under California law, and no investment is completely risk free. Before investing, applicable disclosure documents must be provided. Key risk categories to understand:

• Default risk — a borrower may stop paying, requiring foreclosure to recover the investment
• Illiquidity — unlike publicly traded securities, a trust deed investment generally can't be sold quickly if the investor needs the capital back before maturity
• Property value risk — if the property's value declines, the equity cushion protecting the investment shrinks
• Lien position risk — 2nd and 3rd trust deeds are repaid only after senior liens, and carry materially more risk than a 1st position
• Concentration risk — capital placed in a single trust deed is more exposed than capital spread across several

Past performance — including on past closed transactions Hanover Mortgage Company has arranged — is not a guarantee of future results.

Frequently Asked Questions

Still Have Questions? Let's Talk.

Call: (714) 838-1474 ext. 101
Visit: Hanover Mortgage Company, Tustin, CA