What Is a Trust Deed?

A trust deed is also known as an act or deed of trust, and it is a document that is sometimes used in real estate transactions in the USA.

It is basically a document that is used when the buying party takes a loan from the selling party in order to buy a certain property.

This document represents a proper agreement between the lender and the borrower to buy the property held in trust by an independent and neutral third party until the time the loan is paid off completely.

Although trust deeds are not much common these days as compared to they used to be, some states in the US still offer this facility instead of using a mortgage to provide financing to buy a real estate property.

One of the most significant reasons for a Trust Deed is that it can provide a high-yielding income stream easily.

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Understanding The Details

When a lender gives money to a borrower in real estate transactions, the lender gives the money in exchange for one or more promissory notes that are linked to the trust deed.

Basically, this deed transfers a legal title to the actual property to a neutral trustee, which can either be a bank or a company typically, which holds this title as collateral for the given promissory notes.

After the money is returned and the loan is completely paid off, the buyer gets the full right to obtain proper ownership of the land.

This whole procedure continues throughout the repayment time of the taken loan. If the borrower dodges the loan, in that case, the property can be fully taken control over by the trustee.

Trust Deed Vs. Mortgage

In retrospect, mortgages and trust deeds are both used in private loans and in banks for creating liens on real estate.

Both of these are traditionally recorded as a debt in the country to wherever the real estate property is located.

However, the main difference is that a mortgage involves two main parties, a lender known as mortgagee and a borrower known as mortgagor.

Contrary to that, a trust deed involves primarily three parties, a lender known as the beneficiary, a borrower known as the trustor, and a neutral or third party known as the trustee.

The trustee in the trust deeds holds the title to the lien of the lender’s benefit; in case the borrower tries to default.

Trust Deeds And foreclosures

Trust deeds and mortgages both have different foreclosure procedures, and both processes have different costs and times.

A foreclosure is a judicial process that is a court-supervised procedure enforced when the lender files a proper lawsuit against the borrower of the money for defaulting on the mortgage plan.

However, this whole judicial process is quite a lot of time and effort-consuming as well as pretty expensive.

In addition to that, if the foreclosed real estate property auction does not bring in enough money to pay off the required promissory, there are high chances that the lender might file a deficiency judgment against the borrower of the money and sue him for balance.

But even after the property is sold, the borrower has all the rights for redemption, and they can repay the amount to the lender within a certain amount of time and acquire the title of the property.

In case of trust deeds, it lets the lender initiate less expensive and much faster non-judicial foreclosure by bypassing the court system and sticking to the actual processes that were outlined in the state law and trust deed document.

The property is generally put up or auctioned through a trustee’s sale if the borrower is not able to make the loan current.

After this, the title transfers from the trustee to the new owner with the help of the trustee’s deed after it is sold.

The property eventually reverts to the lender when there are no bidders present at the trustee sale.

Once the land is sold out, the borrower will have no right of redemption after that. Furthermore, the trustee would be responsible to pay the proceeds from sales to borrower and lender once the sale is finalized.

Pros And Cons Of Trust Deeds

For the investors who are in search of some juicy investments they sometimes turn to the real estate property sector, especially trust deeds.

In the trust deed investing, the process involves the investor lending money to a certain developer who is working on some real estate project. After that, the name of the investor pitches in as a lender.

The investor is supposed to collect the interest on his given loan, and once the project is ended, his principles and credentials are returned back to him in full.

Some of the pros and cons of the trust deed are listed below:

Pros

  • Trust deed is a high-yielding income stream that can bring in lots of money through interest.
  • It provides portfolio diversification.
  • It is a fixed payment term and typically lasts for only a few years.
  • Once the trust deed ends, all your debts are written off.
  • In this process, you only have to pay what you can afford based on your circumstances.
  • It has no hidden fees or any kind of application fees.

Cons

  • One of the major disadvantages of a trust deed is that your deed might not achieve a protected status, and there is always a risk present of someone voting against it.
  • It can have an impact on your credit ratings.
  • In trust deeds, you might have to remortgage or sell your assets for the payment of your debt.
  • Your employment can also be affected by trust deed because of the restrictions of trust deed present in some professions.

Conclusion

In the end, it is safe to say that investing in trust deeds has its own certain levels of advantages and disadvantages as well.

Unlike stocks, these real estate investments are not liquid, and investors can not retrieve their money once they have pitched in.

However, it is a proper legal document that sets out legitimate rules for operating and establishing your funds.