Guide For California Trust Deed Investing

By Chasity Sheppard


California trust deed investing allows people to make investments in real estate and secure high returns while doing away with the need to actually own or maintain any properties. The investor simply has to provide funding to someone else who is buying the property. The concept is essentially the same as institutional mortgage lending, but modified to facilitate lending by individuals.

It sounds like a sure thing, but there's a lot to be learned before signing off on any investment. Investors typically go through a mortgage loan broker or MLB who arranges financing for individual homebuyers and professional real estate investors. Those using the funds may be REITs, developers or simply other investors who are open to owning properties.

A number of factors need to be considered carefully when making this kind of investment. Getting hold of an accurate valuation and doing a title search are essential items on the checklist. Calculate the loan-to-value difference, equity and the margin of safety. A background check to determine the borrower's creditworthiness is required to find out if the investment is safe and has a good chance of being repaid.

Most of this is the same standard due diligence that mortgage lenders do when providing a housing loan. Instead of a mortgage agreement, the lender gets a deed of trust and a promissory note. The latter is proof of the debt owed, and the former puts up the property as collateral against this debt.

As per the rules and regulations set forth by the California Department of Real Estate, investors may not commit more than 10 percent of their net worth or their annual income on such a transaction. Also, it's standard practice to maintain a loan-to-value ratio of around 65 percent. This means there's a 35 percent margin of safety, which is the difference between the property value and the loan amount.

The reason this margin must be kept on the higher side is to minimize the risks associated with the investment. If the borrower defaults, foreclosure proceedings will have to be initiated to take possession of the property and then sell it off to recover the loan amount. In such cases, it's vital that there be enough of a margin of safety to cover both the loan balance and legal costs.

In some cases, there may be other loans on the property. The borrower's equity will then be different as compared to the protective equity available. Junior lenders then have to consider the costs of clearing delinquency on senior loans and foreclosure. Investors need to familiarize themselves with these and other such issues. A lot of this knowledge comes naturally to people who have a few real estate transactions under their belt.

New investors are advised not to give their hard earned money directly to borrowers or unknown investors. Do some research and get in touch with the Department of Real Estate to find out all the applicable regulations and compliance issues before doing anything else. After that, go through an MLB or REIT with a good reputation in California trust deed investing to ensure solid returns without having to take on too much risk.




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