Frequently Asked Questions
1. What is a Trust Deed?
A Trust Deed is a document recorded with a county recorder’s office creating a secured lien on real property which provides collateral for lenders and trust deed holders. Some states use a Mortgage instrument rather than a Trust Deed.
A borrower who owns or wants to own real estate needs a loan. The borrower executes a Promissory Note wherein the borrower promises to repay the lender. The recorded Trust Deed creates the secured interest attached to the borrower's real property. Private Investors provide the money to fund the loan to the borrower. If the borrower does not pay as promised, the Lender/Trust Deed Investor can look to the real property for repayment and/or recovery of their invested capital.
3. Why would an investor get involved?
A Trust Deed investment occurs when an investor purchases all or part of the Note and Deed of Trust. The Investor can earn a 7.00% to 10.00% annualized yield and receives monthly interest payments as borrower makes payments.
4. What are the benefits of Trust Deed Investing?
Investors enjoy monthly interest payments on their invested capital. Yields are higher compared to other fixed income securities. Real estate collateral is often viewed as more tangible than stocks and equity investments. Mortgage Brokers who specialize in this type of investment arrange the transaction, collect and distribute monthly payments, and handle most problems that may arise, through the payoff of the loan.
5. How do yield compare to other investments?
Yields are typically higher. Trust deed mortgage investments currently yield from 7.00% to 10.00% annually, with monthly interest payments as borrower makes payments.
6. Should I invest all my funds into one Trust Deed or several?
We believe in "Diversification." It is advisable to invest a divided portion of your money into a number of different Trust Deeds with varying property types, property locations, loan-to-value ratios, and maturity dates. If one borrower does not pay on time the affect on your cash flow should be less. In other words, you would be diversifying your investments and reducing your overall risk.
7. Why would a borrower pay higher rates for loans when bank rates are less?
There are many reasons borrowers request private money loans. A few include:
1. Loan request may have unconventional issues that make it difficult to obtain a bank loan
2. Short loan term may be desirable to fulfill borrower's goal
3. Property may include a special purpose building
4. Borrower may have overall good character however their credit score may be less than acceptable at a bank
5. The property may be new or newly renovated in a good demand area however rents have not stabilized or seasoned
6. Loan request may include cash out such as to rehab property condition
7. Existing loan may have matured and borrower needs time to locate long term permanent financing
8. What is the difference between First and Second Deed Investments?
The difference between a First and Second Trust Deed is the priority of the lien based on the date the Trust Deed is recorded. The earlier recording date would have priority (i.e. first position). If you have a Second Trust Deed and the Borrower fails to pay the First, you would be responsible to make the First Trust Deed payments or suffer the risk of being foreclosed out and losing your invested capital.
9. What should I look for when evaluating a trust deed investment property?
Property type is the first item to look for. So-Cal Capital suggests that Investors choose mainstream real estate property in Metropolitan Service Areas "MSA" where there is a resale market. This would include properties such as: homes, apartments, commercial and industrial buildings, churches, and land. Avoid properties such as: water slide parks, fish farms, health clubs, and rural properties. You, the investor, should always require an independent appraisal of the property is obtained.
Another item to look for is the ratio between the mortgage loan and the value of the real estate, pledged as security, which is expressed as a percentage. This is referred to as the Loan-to-Value Ratio:
LOAN = LTV $500,000 = 62.5% (LTV)
In this example, the loan, expressed as a percentage of the property is 62.5%. The higher the loan-to-value ratio, the greater the lending risk because the protective equity declines as the LTV increases.
Example: An 8 unit apartment building is valued at $750,000. If we are making a 65% of value loan, the loan is $487,500. ($750,000 X .65 = $487,500) The difference between the value of the property and the loan is $262,500. This is referred to as "protective equity" or "equity cushion."
It is not advisable for you to accept a "Broker’s opinion of the value" or a so-called "in-house appraisal" directly employed by the Broker. This creates an obvious conflict of interest.
You should also require the company to obtain title insurance, insuring your lien position (First or Second) and insuring the property is free of unexpected liens & encumbrances.
10. What "Borrower's Consideration" should I be concerned about?
So-Cal Capital is primarily a collateral based lender and to a lesser degree a credit based lender. In other words, we look first to the real estate collateral and secondly to the ability to repay from either the property cash flow, borrower's personal resources or other means, and third to the borrower’s credit to determine the likelihood of the borrower’s ability to repay the debt. We obtain an appraisal report, a credit application including financial statements, interview the borrower personally and then underwrite the risk for presentation to the investors for approval.
11. How do we get paid off the maturity date of the loan?
Part of our initial underwriting is to determine the borrower’s exit or payoff strategy at the end of the term of the loan. Generally, the borrower will sell the property and pay off the loan with the sale proceeds, refinance with another Lender, or extend the loan with us.
12. What should an Investor expect in their investment package?
In order for you to make an informed decision, you should require in your full Material Disclosure Package at least the following along with your subscription agreement, offering circular, investor questionnaire and other documents describing investment risks:
1. Loan Summary of the Trust Deed Investment
2. Regional and Local Location Maps for the subject property
3. Loan Application of the borrower
4. Credit Report of the borrower
5. Financial Statements of the borrower
6. Appraisal from independent, certified appraiser with original photographs and area location map
7. Borrower Escrow Instructions, copy of Promissory Note and Deed of Trust
8. If your loan will be in second position, a copy of the first position Promissory Note and Deed of Trust.
9. Current Preliminary Title Report issued by the title insurer.
a. Identification of what items will be removed and which items will remain at the close of escrow.
b. Indication of title coverage to be obtained.
13. How is the loan servicing handled?
So-Cal Capital acts as the Loan Servicing Agent for all the loans that we offer to Investors. We perform all standard servicing functions from communicating with the borrowers to collecting the payments. We also monitor the status of property taxes and property insurance and issue demands for payoff statements and reconveyances once the loans are paid in full. Each member of our senior management team has in excess of 20 years of experience in servicing loans which includes expertise in: slow paying accounts, bankruptcies, foreclosures, and liquidating real estate assets.
14. How do we get started?
When you are ready to invest or simply have more questions, call us at (800) 880-5735 or (949) 661-7070. Speak to an Investor Relations Representative and get your questions answered. Or if you prefer, Contact Us today!