Investments in Trust Deeds – Mitigation of Foreclosure Risk

There are 9 risks of investing in trust deeds and in this article I will discuss the risk of foreclosure and how to significantly mitigate this risk.

As a private lender who lends money secured by real estate, foreclosure is what allows you to recover your investment in the event the borrower defaults. So why is foreclosure considered a risk when investing in deeds of trust or lending money against property?

Part of the problem is that when a borrower defaults on their loan, there can be additional complications, such as larger liens that they are also failing to pay. What happens if you lend money and the borrower doesn’t pay you back, in second position, and the lender in first position doesn’t pay back either? Well, if you don’t protect your position, you can lose your entire investment. Protecting your position may mean you need to bring the entire first loan current by making up any missed payments or, in some cases, you may need to pay the primary lien holder in full to protect your investment.

Don’t underestimate the time it takes to go through the foreclosure process. Personally, I do not recommend that you try to foreclose on your own mortgage, although I do know people who routinely do their own foreclosures. Instead, I suggest you find a competent attorney and make sure you are doing the right thing to protect your investment and pursue foreclosure. Having a competent attorney handle this for you really makes this type of investment that much more attractive. While we don’t normally expect to have to foreclose on a mortgage when we make the initial investment, knowing that you have someone who can handle it in a way that is almost completely independent to you is just plain good business.

Of course, we assume that you are wisely selecting the loans you make based on the borrower, the property itself (with a good and accurate appraisal), and also the amount of your loan compared to the value of the property (i.e., wants a healthy capital cushion). When you combine a good selection of borrowers with professional, competent appraisals and a conservative loan-to-value ratio along with access to a great attorney should you ever need to foreclose, investing in a deed of trust is a very attractive investment.

Fixed, often high rates of return, secured by real estate worth 30% or more of your initial investment, make deeds of trust an attractive alternative investment in today’s market. It is worth any serious investor’s time to take a closer look.