A Conversation with An Experienced Real Estate Trust Deed Investor
We all can learn something from anyone we meet.
I personally enjoy learning from others, especially those who have already done what I am trying to do.
Today I had a meeting with a very experienced investor who has been investing for over 30 years. He has properties all around the central valley in California and had a specific business plan that he has used to build his real estate trust deed business.
He explained to me how he finds people who want to own a home but are not able to get financing for numerous reasons. The buyers he has have already saved up $35,000 – $40,000 for a down payment but cannot buy a house through a bank. These buyers have the deposit, they monthly income to make the payments, and the desire to own a home.
The beauty of this is he already has the buyer for the property BEFORE he buys the house!
Basically he has become the bank for these home buyers. All the headache of owning a rental property is removed from the business because all expenses are taken care of by the buyer.
The Trust Deed Process Step-by-Step
- Finds the buyer with at least $35,000 down payment
- Finds the home and puts it into escrow
- Before escrow closes, the buyer pays him the down payment
- At close of escrow, he records the deed of trust with the terms written out
- The terms have the interest rate, number of payments, down payment, and sale price
- Buyer signs a promissory note to repay the loan with the agreed terms
- Sells the property to the buyer for an agreed upon price (higher than what he bought it for)
- Collects monthly principle and interest payments from the buyer
- Buyer pays ALL expenses as a normal homeowner would. Taxes, insurance, utilities, repairs, maintenance, etc.
Real Estate Trust Deed Investment
A trust deed is a document recorded with the County Recorder's office and creates a secured lien on the property protecting your investment.
Here are some benefits of using a real estate trust deed:
- Monthly income with principle and interest payments
- Higher interest rate than traditional banks because it is private money
- Real Estate Trust Deeds are very liquid and can sell easily to another investor
- You can borrow against them using it as security for a note
- The buyer pays all the expenses, taxes, utilities, repairs, maintenance, etc.
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Trust Deeds are not complicated but there are some key things to know about them.
Buyers Financial Standing and Creditworthiness
Just like a bank, you need to do a complete inspection of the buyers creditworthiness AND verify everything.
If you try to get a loan today, you will need to verify your financial standing and your ability to repay your debt. Same thing should go for your buyers. The last thing you want is someone who is not able to pay the monthly note payment and have to foreclose on them to get your property back.
Do a full credit and background check. I personally use www.tenantbackgroundsearch.com for all my background checks. The price is very reasonable and they give great information. Here is a copy of a background check I did recently with the important information redacted.
Once you have the background and credit check done, verification of employment is crucial. If they do not have a steady job, you can expect to be missing payments sooner or later.
Is the Buyers Down Payment Sufficient for the Purchase
The down payment amount is really your decision how much you require of the buyer. The more money they put down, the more interest they have in following through with all the payments.
If the buyer does not make the payments, the down payment is yours and you get the property back.
Make sure you get the down payment BEFORE you file the deed of trust. Usually the escrow company does this for you so make sure you get your money.
Know the Market Value and Equity In The Property
Finding the market value of a home is not difficult if you know what you are doing.
Think of it like this. If you are going to purchase a 5 year old used car, how would you know how much you should pay for it to get a good deal? You would look around for other cars of like kind that are for sale in the immediate area. This process is called comparable sales. You find something comparable to what you are buying and see what they are selling for or have already sold for.
Anything is only worth what someone is willing to pay for it. Because there is such a thing as comparable sales, you can have a good estimate of what proposed property is able to sale for.
Let's say you are looking to purchase a 3 bedroom 2 bath house with 1500 square feet. The best way to find the market value is to look in the immediate area (1-2 mile radius) around the current home with the same characteristics. You would not use a 5 bedroom home as a comparable sale normally because it is not like your property. Always look for like kind.
I personally use www.Zillow.com to find comparable sales. These are not 100% accurate but I have found they are in the ballpark with a + or – 10%.
If Zillow says the poperty is worth $150,000, I usually estimate the value to be anywhere between $135,000 to $165,000. I know this is a large variance but if these fit into your numbers where you make money at $135,000, then it is still a good deal.
Once you understand the market value of the home, you can move to purchase the property at a good price and then sell the property to the buyer at an even higher price.
Think of the increase in prices as a premium service charge for your buyer.
Escrow Process with a Reputable Escrow Company
The escrow process is really very simple.
When you start the process with the escrow company, inform them that you are doing a trust deed with a promissory note. More than likely they have come across this many times and can walk you through ever step of the way.
Really, all you need to do is have your Real Estate Trust Deed signed and notarized and the Escrow company will do the rest.
Know the Process to Recover Your Investment When the Buyer Fails to Pay
When the buyer fails to pay, you need to go through a foreclosure process. It is not like a rental property with a tenant. You cannot just evict them. You need to go through the entire foreclosure process as a bank does when it forecloses on a borrower.
The foreclosure process is a big ball of wax that we will dive into in another post and is too big for this post on real estate trust deeds.
New Business Strategy for Real Estate Investing
After having this conversation with this investor, I have a lot of information to chew on. Since I will be quitting my job very soon, I will have plenty of time to devote to making money in real estate. This would be a great opportunity to start a new strategy of my real estate business here in my local area of the Central Valley in California.
I can't wait until I quit! Time is moving too slow!
So, have you ever had experience with a real estate trust deed? Leave me a comment below!
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