Purchasing commercial real estate can be quite different from purchasing a home, especially when the buyer is a property investor. For example, rather than going to a bank and asking for a traditional mortgage, the investor might work with a hard money lender to facilitate a trust deed transaction.
Trust deed transactions are interesting transactions with some unique characteristics. They are often the vehicle of choice for hard money lenders financing real estate investments. A trust deed arrangement streamlines the process, gets a buyer to closing quickly, and adequately protects the lender from serious financial loss.
How a Trust Deed Works
A trust deed, sometimes referred to as a deed of trust, is a legal document that establishes custody over a piece of property. The best way to understand it is to compare it to a traditional mortgage.
When a person obtains a mortgage to buy a home, the deed for that home is transferred into his name. He is the legal owner of the home from the minute all the documents are signed. In order to protect its interests, the bank places a lien on the home. That lien remains until the mortgage is paid in full.
In a trust deed arrangement, the buyer becomes the legal owner of the property at closing. However, the deed is transferred to a third party for custodial purposes. That third party is usually a title company. However, it could be an attorney or any other third-party a buyer and lender agree on.
As the trustee, the third party maintains custody over the property even though the buyer owns it. Custody stays with the third-party until the hard money loan is paid off. At that point, the deed is transferred into the buyer’s name.
Why Hard Money Lenders Prefer Them
Salt Lake City, Utah-based Actium Partners is one example of a hard money firm that does not write traditional mortgages. Like so many other lenders in the hard money industry, they prefer trust deed arrangements. Why? Consider the following:
- Speed and Cost – Trust deed arrangements can be put together more quickly and at a lower cost. Both are things that the hard money industry considers advantages. Lenders want to get deals done as quickly as possible and without spending too much money.
- Power of Sale – Trust deed arrangements almost always include a power of sale clause. This allows the lender to sell the property in question should the borrower default.
- Non-Judicial Foreclosure – Most important is the fact that trust deed arrangements offer the opportunity for non-judicial foreclosure. Should a borrower default, the lender does not have to go to court to foreclose.
Trust deed arrangements benefit real estate investors by giving them access to fast cash based on asset value. When you are a real estate investor competing against a number of others for the best properties, speed is a big advantage.
By the same token, a trust deed arrangement goes a long way toward protecting a lender’s financial interests. Such arrangements significantly reduce lender risk by eliminating much of the red tape normally involved with mortgages.
Beyond Commercial Real Estate
One final note of interest: some states either mandate or allow the use of trust deed arrangements instead of mortgages. In such states, even residential real estate transactions are governed by trust need arrangements. However, these states are the exception to the rule.
The trust deed transaction is a unique kind of transaction that is perfectly suited to real estate investing. It is no wonder hard money lenders and their clients appreciate the arrangements as much as they do.
