A typical residential real estate transaction involves a mortgage. There are exceptions to the rule. In some cases, the two parties may prefer a trust deed instead. Trust deeds differ from mortgages in a couple of ways. They are workable in residential real estate, but what about commercial property? Furthermore, are trust deeds and hard money compatible?
The question of compatibility is important to real estate investors, as they often rely on hard money to get deals done. Any investor wanting to go the trust deed route would have to look around for a lender willing to go along. That is not necessarily a given, though trust deeds are fairly common in the commercial sector.
1. More About Trust Deeds
A trust deed is more or less a legal document that transfers a property’s legal title to a third-party. You may have a hard money lender and its client agreed to a trust deed that transfers legal title to the title company the hard money lender normally works with.
Transferring legal title means that the title company holds the property in trust until the hard money loan is paid off. The equitable title, which gives the borrower legal right to occupy and use the property, remains with the buyer as long as they do not default on the loan. Legal title is transferred to the buyer once the loan is paid in full.
2. Advantageous to the Lender
Salt Lake City’s Actium Partners says that, while not all hard money lenders are willing to work with trust deeds, the arrangements do offer a very attractive advantage to lenders. That advantage manifests itself when a borrower defaults.
Without a trust deed, the lender takes on the responsibility of foreclosing on and disposing of the property in question. In a trust deed scenario, that responsibility falls on the trustee. Thus, agreeing to a trust deed deal mitigates some of the lender’s responsibilities in the event of default.
3. From the Borrower’s Point of View
Trust deeds look a little bit different from the borrower’s point of view. On the positive side, a trust deed arrangement is almost always easier to secure than a commercial loan. Trust deed arrangements also tend to be much quicker to execute. You can get a deal done in a couple of days.
On the downside, it doesn’t take as long for trustees to foreclose in the event of default. That is by design. A hard money lender cannot afford to go through a long, drawn-out process that could take a year or more. It has too much money wrapped up in the deal. The lender wants foreclosure and disposal to happen much more quickly.
Trust deeds allow for much faster action in the event of default. Lenders and trustees generally give borrowers a limited amount of time to bring their deficient loans current. If that is not done, they move quickly to foreclosure.
4. Not the Right Tool for Everyone
Real estate investors have plenty of options for funding new investments. Trust deeds are but one of them. Needless to say, the trust deed is not the right tool for every deal. It is not even the right tool for every investor. The details of any deal need to be worked out between lender and borrower in a way that satisfies both.
As for compatibility, there is nothing inherent to trust deeds that make them off-limits to hard money lenders. Hard money and trust deeds are quite compatible for real estate investments. Trust deeds work well when they are a good fit for the deal in question.