Summary:
Private parties serve as the source of investment capital, while money loan brokers facilitate and arrange real estate loan transactions, utilizing these private party investors as lenders. Investors, in turn, receive a robust package of collateral for their investment, including a promissory note, a recorded deed of trust, and a title policy, all bearing their names as beneficiaries. This structure is not just designed to ensure the security of their investment but to provide a strong sense of reassurance, making them feel secure and at ease.
Private parties are drawn to trust deed investing for its attractive yields and relatively passive management. After thoroughly reviewing the material disclosure package, investors decide, based on their knowledge and experience, to deposit their signed documents and proceeds. As the process unfolds, the loan servicer, a professional entity responsible for collecting and managing the loan, assumes the bulk of the work, ensuring timely payments and addressing any issues that may arise during the loan term. This structure offers excellent returns and provides a sense of security and peace of mind, making it an intriguing investment opportunity for potential investors.
Article:
Investors/beneficiaries have the power to purchase either a whole promissory note and trust deed (100%) or a fractional portion of the whole. If they choose the latter, they can join other investors, holding their share as tenants-in-common. This flexibility empowers investors, allowing them to customize their investments to their preferences and financial capabilities, instilling a strong sense of control and confidence in their investment decisions.
A $500,000 trust deed investment may have multiple investors/beneficiaries. For instance:
Party-Archers- $ 100,000 or a 20% undivided interest;
Party-Bowens- $50,000 or a 10% undivided interest;
Party-Crowns- $200,000 or an undivided 40%,
Party-Downs- $150,000
Diversification plays a crucial role in trust deed investing. An investor with $1,000,000 could purchase a single trust deed or a portion of 3 to 5 different trust deeds. Diversifying your investments across multiple trust deeds can help spread risk and increase returns, as each trust deed represents a different property and borrower. If one borrower defaults, the investors’ entire investment is not at risk, as other trust deeds in their portfolio are not affected.
Brokers play a crucial role in trust deed investing. They procure loans to deliver to brokers representing private party investors, acting as intermediaries and bringing forth loan requests from the borrowing public. These brokers act as fiduciaries of the borrowers. While they do not have direct access to a private-party investor base, they function as subagents to the private money capital broker, responsible for connecting the borrowing public with private-party investors. This clear explanation of the brokers’ role will make potential investors feel informed and aware of the process.
Deeds of trust are a form of security, creating a security interest in the collateral property. As such, fractional investments need to be exempt from federal registration. In California, a single investor investing 100% of a loan falls under Section 25100(p) of the California Corporations Code. Loans with up to 10 investors fall under Section 25100(e) or 25102.5 of the Business and Professions Code. Those brokers who use 25100 (e) must have a dedicated offering circular, disclosure documents, a subscription agreement, and suitability standards for each investor per transaction. Those who use 25102.5 as an exemption will find that their disclosure documents are part of the Business and Professions Code sections 10237, 10238, and 10232.5. The code provides for disclosure documents in the form of lender-purchase disclosures. If brokers occasionally need more than 10 investors, they must use the private offering exemption 2501 (f). Brokers who wish to gain more knowledge in this area should consult an expert or a lawyer specializing in these areas.