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There are 9 risks to investing in trust deeds and in this article I will be discussing the risk of foreclosure and how to significantly mitigate this risk.
As a private lender who is loaning money secured by real property, foreclosure is what allows you to recoup your investment should the borrower stop performing. So why is foreclosure considered a risk when investing in trust deeds or loaning money against property?
Part of the problem is that when a borrower fails to pay on your loan, there may be additional complications like senior liens that they are not paying on as well. What happens if you lend money and the borrower is not paying you, in second position, and is not paying the lender in first position either? Well, if you fail to protect your position, you may lose your entire investment. Protecting your position may mean that you need to bring the entire first loan current by making up back payments or, in some cases, you may need to completely pay off the senior lien holder to protect your investment.
Do not underestimate the time that it takes to go through the foreclosure process. I do not personally recommend that you try to foreclose yourself even though I know of people who routinely do their own foreclosures. Instead, I suggest that you find a competent attorney and have the attorney make sure that you are doing the right things to protect your investment and conduct the foreclosure. Having a competent attorney to handle this for you really makes this type of investment much more attractive. While we do not normally expect to have to foreclose when we make the initial investment, knowing you have someone that can handle it in a way that is almost completely hands off for you is just good business.
Of course, we are assuming that you are prudently selecting the loans you are making based on the borrower, the property itself (with a good, accurate appraisal) and also the amount of your loan in comparison to the value of the property (that is, you want a healthy equity cushion). When you combine good borrower selection with professional, competent appraisals and conservative loan to value ratios coupled with access to a great attorney should you need to foreclose, trust deed investing is a very attractive investment.
The often high, fixed rates of return secured by real property worth 30% or more than your initial investment makes trust deeds an appealing alternative investment in today’s market. It’s worth any serious investor’s time to take a closer look.