What is a trust deed?

In US real estate transactions, a trust deed often called a deed of trust, is a document that is sometimes used. It’s a legal agreement that applies when one party borrows money from another to buy real estate. A trust deed is a legal document that outlines a lender-borrower arrangement for the property to be held in trust by an impartial third party while the debt is being repaid.

Twenty states still require a trust deed rather than a mortgage when financing is involved in acquiring real estate, even though they are less frequent than once. Among the states where trust deeds are often used are Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Tennessee, Texas, Virginia, and West Virginia.

A few states permit using trust deeds and mortgages, including South Dakota, Kentucky, and Maryland.

Understanding Trust Deeds

• A transaction involving three parties is called a trust deed.
• The formal term for lenders is beneficiaries. These are the interests that a trust is meant to guard.
• A borrower is sometimes called a trustee. This is the one who builds a relationship of trust.
• A trustee is a third party appointed to care for the property entrusted to them until a loan or debt is fully settled.

In a real estate transaction—the purchase of a property—a lender offers the borrower money in return for one or more promissory notes attached to a trust deed. This deed conveys legal title to the real property to an impartial trustee, generally a title firm, escrow business, or bank, who retains it as security for the promissory notes. The equitable title—the right to gain complete ownership—remains with the borrower, as does full use of and responsibility for the property.

This state of affairs continues throughout the repayment period of the loan. Until the debt is fully paid, the trustee is the legal owner of the property; after that, the borrower becomes the new owner. The trustee assumes complete ownership of the assets if the borrower fails to pay the loan.

Mortgage vs. Trust Deed

Both trust deeds and mortgages are usually recorded as debt in the county where the property is situated, and they are both used in bank and private loans to create liens on real estate. There are some distinctions, however.

Number of Parties

A borrower, a mortgagor, and a lender, often known as a mortgagee, are parties to a mortgage. A borrower pledges their property to the lender as security when they sign a mortgage, guaranteeing repayment.

On the other hand, a trust deed identifies three parties: the trustee, the lender, and the borrower, sometimes known as the trustor or beneficiary. For the lender’s benefit, the trustee is the owner of the lien; should the borrower fail, the trustee will, at the lender’s request, start and finish the foreclosure process.

Sort of Foreclosure

A deed of trust will lead to foreclosure proceedings different from a mortgage in the case of failure. A judicial foreclosure will follow a non-compliant mortgage, requiring the lender to get a court order. If a trust deed has a power-of-sale provision, it may be foreclosed without going through a court process.

Compared to non-judicial foreclosures, judicial foreclosures are more costly and time-consuming. This implies that, from the lender’s perspective, a deed of trust is better than a mortgage in places where they are permitted.

Despite common misconceptions, a mortgage is an arrangement that pledges property as security for a loan, rather than a loan used to purchase a property.

What does a trust deed contain?

• The same kinds of details included in a mortgage contract will also be included in a deed of trust, including:
• The borrower’s, lender’s, and trustee’s identities
• A detailed account of the assets to be entrusted
• Any limitations or specifications on how the property may be used while it is held in trust
• The loan’s conditions, such as the interest rate, principal, and monthly installments
• The conditions of any penalties and late fees in the case of repayment

A power of sale provision, which gives the trustee the authority to sell the assets in case of borrower failure, is also included in a trust deed.

Trust Deeds and Foreclosures

Foreclosure procedures vary for mortgages and trust deeds. A judicial foreclosure is a procedure executed under court supervision when the lender sues the borrower for failing to make mortgage payments. The procedure is costly and time-consuming.

Additionally, the lender may file a deficiency judgment against the borrower and sue for the remaining amount if the proceeds from the foreclosure property sale are insufficient to settle the promissory note. However, the borrower retains the right of redemption even after the property is sold; they may return the funds to the lender within a specific time window and obtain ownership.

On the other hand, a trust deed enables the lender to start a quicker and less costly non-judicial foreclosure process, avoiding the court system and following the guidelines specified by the state and the trust deed. The property is auctioned via a trustee’s sale if the borrower fails to make timely loan payments.

Following the transaction, the trustee’s deed allows the new owner to transfer ownership from the trustee. A trustee’s deed returns the property to the lender if no bidders attend the trustee sale. The borrower loses all rights to redemption when the property is sold.

In addition, when the sale is completed, a trustee distributes the transaction’s revenues to the lender and borrower. To enable the lender to buy the property, the trustee will pay the lender the remaining balance on the loan and any cash that exceeds that amount to the borrower.

Benefits and Drawbacks of Purchasing Trust Deeds

Sometimes, investors looking for high returns may go to the real estate market, specifically to trust deeds.

An investor who participates in trust deed investing gives money to a developer engaged in a real estate project. The deed of trust lists the investor as the lender. After completing the project, the investor receives the entire interest on his loan and principal. A trust deed broker often facilitates the transaction.

• Advantages: High-yielding revenue source
• Diversification of portfolios
• Cons: Lack of liquidity
• Absence of capital growth

What kind of developer engages in this contract? Banks often avoid particular sorts of ventures, such as mid-size commercial projects that are too large for small lenders but too small for major ones or developers with a bad credit history or an excessive loan history. In addition, cautious lenders could go excessively slowly when developers are under pressure to start or finish a project by a specific date.

These kinds of developers are often in a tight spot. Investors in trust deeds may often anticipate high interest rates on their capital because of these factors. They don’t need to be professionals in the development or management of real estate to gain from diversifying into another asset class. One kind of passive investing is this.

Investing in trust deeds has several risks and drawbacks. Real estate investments are not liquid, in contrast to equities. Thus, investors cannot get their money back quickly. Furthermore, investors should only anticipate the loan’s interest yields; further capital growth is doubtful.

Any legal inconsistencies in the trust deed might be exploited by interested parties, leading to expensive legal entanglements that could jeopardize the investment. It might be challenging for the average investor with minimal experience to locate reliable developers, projects, and brokers since it requires specialized knowledge.

A Practical Illustration of a Trust Deed

Austin County, Texas, meets most lenders’ short-form deeds of trust criteria instruments. The form opens with terms defined and blanks for the names of the lender, trustee, and borrower. Knowing the property’s address and the amount being borrowed is also necessary.

The document then specifies the transfer of property rights and uniform covenants, which include the following:

• Information about principal and interest payments
• escrow money
• Liens
• Maintenance of structures and property insurance
• Structure occupancy: Requiring the borrower to move in within sixty days

Nonuniform covenants, which define default or violation of any agreement terms, are also included in the form. Furthermore, it makes clear that the loan covered by the document is for the purchase of the property rather than a home equity loan, which is one from which the borrower will receive cash.

The deed of trust closes with a space for the borrower to sign; this must be done in front of two witnesses who also need to sign and a notary.

What does a deed of trust assignment mean?

The simple transfer of a deed of trust from one party to another is known as an “assignment” in real estate law. This typically occurs when a trust deed beneficiary sells their loan to another financial institution.

What Does a Deed of Trust’s Reconveyance Mean?

In real estate law, conveyance refers to property passing from a trustee or lender to a borrower. This often occurs after the borrower has fulfilled the requirements of their obligation, which is the conclusion of a mortgage or other loan.

In a deed of trust, who can be a trustee?

Certain states have regulations restricting who can serve as trustees under a trust deed. In these states, a trustee must be a bank, credit union, thrift store, title insurance provider, lawyer, or other business expressly permitted to maintain a trust. In other states, a trustee may be anyone.

The Bottom Line

Trust deeds are an alternative to mortgages in some states. Instead of an arrangement directly between a lender and a borrower, a trust deed leaves the title of a property in the hands of a third person or trustee. Only once the borrower has met the loan conditions with the lender will the property be transferred entirely to the borrower.

Conclusion

• In funded real estate transactions, trust deeds transfer the legal title of a property to a third party—such as a bank, escrow business, or title company—to retain until the borrower repays their loan to the lender.
• Trust deeds are utilized instead of mortgages in certain states.
• Investing in trust deeds may generate a high-yielding income stream.