What Is a Trust Deed?
A trust deed, also known as a deed of trust, is a crucial document utilized in real estate transactions in the United States. It comes into play when one party secures a loan from another party to buy a property. This legal document signifies an agreement between the borrower and lender to have the property held in trust by an impartial third party until the loan is fully repaid.
While trust deeds are less prevalent than in the past, around 20 states in the U.S. still require their use instead of a traditional mortgage when real estate financing is involved. States where trust deeds are common include Alaska, California, Colorado, and Texas, among others.
Some states, like Kentucky and Maryland, allow for the use of both trust deeds and mortgages simultaneously, providing flexibility in real estate transactions.
Understanding Trust Deeds
A trust deed involves three key parties: the lender (beneficiary), the borrower (trustor), and the trustee. The trustee holds the property in trust until the loan or debt is fully paid off.
- Lenders, referred to as beneficiaries, safeguard the interests that the trust aims to protect.
- Borrowers, also known as trustors, are individuals establishing the trust.
- Trustees, neutral third parties, are responsible for holding the entrusted property until the debt is settled.
In real estate transactions, the lender funds the borrower to acquire a property, with the legal title transferred to a trustee as collateral. The borrower retains equitable title and usage rights during the repayment period until the debt is cleared.
Throughout the loan term, the trustee retains legal title. If the borrower defaults, the trustee assumes full control of the property.
Trust Deed vs. Mortgage
Trust deeds and mortgages both serve to create liens on real estate in bank and private loans, although they differ in structure and foreclosure procedures.
Number of Parties
A mortgage involves two parties: a borrower and a lender. In contrast, a trust deed involves three parties: a borrower, a lender, and a trustee who holds the lien’s title for the lender’s benefit.
Type of Foreclosure
Trust deeds undergo non-judicial foreclosures, while mortgages entail judicial foreclosures requiring court intervention. Non-judicial foreclosures, common in trust deeds, are more cost-effective and efficient for lenders.
From a lender’s perspective, trust deeds are preferred in states allowing non-judicial foreclosures due to their streamlined processes.
Contrary to popular belief, a mortgage does not directly finance a property purchase; rather, it secures the property as loan collateral.
What Is Included in a Trust Deed?
A trust deed contains similar information to a mortgage document, including details about the borrower, lender, trustee, property specifics, loan terms, and clauses relating to property usage and default penalties.
- The identities of the borrower, lender, and trustee
- A detailed property description
- Usage restrictions during the trust period
- Loan terms, including principal, interest, and penalties
Additionally, a trust deed typically features a power-of-sale clause enabling the trustee to sell the property in case of borrower default.
Foreclosures and Trust Deeds
Mortgages and trust deeds vary in foreclosure processes. Mortgages involve court-supervised judicial foreclosures, while trust deeds allow for non-judicial foreclosures, offering a quicker, cost-effective alternative.
Following a trustee’s sale from a defaulted trust deed, the property title transfers to the new owner via the trustee’s deed. The lender may obtain the property through a trustee’s deed if no bidders participate.
Trustees are responsible for distributing sale proceeds to the borrower and lender post-sale, settling the remaining debt with the lender and any surplus with the borrower.
Pros and Cons of Investing in Trust Deeds
Real estate investors seeking high yields often consider trust deeds as a viable investment option.
Trust deed investing typically involves lending to real estate projects, with investors earning interest income until project completion. This form of passive investment diversifies portfolios with potentially lucrative returns.
Pros
- High-yielding income stream
- Portfolio diversification
Cons
- Illiquidity
- Limited capital appreciation
Trust deed investors often secure significant returns due to the risks involved in projects that traditional lenders may avoid. This approach enables investors to explore a distinct asset class without extensive real estate expertise.
However, trust deed investment entails risks, such as illiquidity and limited capital gains compared to stock investments. Challenges may arise from legal disputes or the complexity of engaging credible developers and brokers.
Real-World Example of a Trust Deed
A typical deed of trust document in Austin County, Texas, outlines lender requirements and includes spaces for borrower, lender, and trustee details, loan amount, and property address.
- Payment specifics
- Escrow funds
- Liens
- Property insurance and maintenance
The deed concludes with borrower, notary, and witness signatures, finalizing the legal transfer agreements.
What Is Assignment in a Deed of Trust?
In real estate, “assignment” refers to transferring a trust deed from one party to another, typically when the original beneficiary sells the loan to a different lender.
What Is Reconveyance in a Deed of Trust?
In real estate, reconveyance signifies the return of property from a lender or trustee to a borrower, typically occurring upon full loan repayment.
Who Can Be a Trustee in a Deed of Trust?
In certain states, only authorized entities like banks, credit unions, or legal service providers can act as trustees in a deed of trust. However, in other states, anyone can serve as a trustee.
The Bottom Line
Trust deeds offer a unique approach to real estate financing in various U.S. states. They involve a tripartite agreement among lender, borrower, and trustee, ensuring the property title is safeguarded until the borrower fulfills their debt obligations.