TRUST DEED INVESTMENTS
Private Investor | Qualifications & Information
Trust Deed Investments are a unique and rewarding investment option offering high current yield and significant safety of principal. Below is an introduction to Trust Deed Investments and an overview of the steps we take to minimize investor risk. Making sure that this type of investment is suitable for an investor is the most important part of our job.
“What are Trust Deed Investments?”
The Promissory Notes and Trust Deeds that we work with are debt instruments. Other debt instruments include Corporate Bonds. With a Corporate Bond, you lend money to a corporation, they agree to make interest payments to you, and pledge to repay your principal investment on a certain date. The collateral for this bond is the plant and equipment owned by the corporation, and the interest rate is determined by the company’s financial strength.
With a Trust Deed Investment, you’re making a loan to an individual or business. Your collateral on that loan is a First Trust Deed and Promissory Note secured by real estate that is owned by that borrower. This type of investment is similar to a loan issued by a bank, or a mortgage lender, except that you provide the capital to finance the borrower. This is why we call it peer-to-peer. The borrower then agrees to make payments to you consisting of interest only in most cases, or of principal and interest in others. The interest rate is determined by: A) The financial strength of the borrower, B) The type of property, and C) The loan-to-value ratio of the property used as collateral.
At Pacific Capital Solutions,
Safety of Principal is our number one goal!
Today’s market is very strong for this type of investment, particularly as the major lending institutions continue to tighten their lending standards. As a result of these tight standards, many potential borrowers find themselves temporarily unable to obtain traditional, or conventional, financing. In today’s market, the investment opportunities for Peer-to-Peer Mortgage Lending can be both profitable and secure.
“Why would an investor consider a Trust Deed Investment?”
Promissory Note and Trust Deed Investments generally offer high yields. Few investors know about them, thus supply and demand has kept the rate up. All fees associated with the loan are typically paid by the borrower, and if an investor is looking for income, these investments offer a considerably higher yield than most other fixed income debt instruments.
“If they offer a higher yield, aren’t they riskier?”
Principal is well secured by the underlying value of the real estate securing the loan. We will rarely offer investments with a loan-to-value exceeding 70%. Many of our offerings have even lower loan-to-value ratios, thereby reducing the risk even further.
Our economy has rebounded from the lows of 2008 market crash, and the opportunity for Trust Deed Investments is one of the best we have ever seen, for two reasons:
FIRST: Market property values are derived from property appraisals under current market conditions, for the area the property is located in. The First Trust Deed lending we are doing is secured by Oregon real estate with a maximum loan-to-value ratio in the 65% to 70% range. That means there should be enough equity in the property to protect the investment.
Our #1 goal of “Safety of Principal.” We do everything possible to protect the integrity of appraisals, using appraisers with the professional designation of MAI whenever possible.
SECOND: The quality of borrowers today is unprecedented in their qualifications, credit scores, verifiable income, and ability to repay. Even so, commercial banks are simply not providing credit on some sort of properties and projects. As private lenders, we’re here to fill that gap, and therefore we can be very selective about who we loan money to.
With interest rates on other fixed rate investments at or near historic lows, maybe Trust Deed Investments should be considered for your portfolio.
INVESTOR EXPECTATIONS AND SUITABILITY
Suitability: State of Oregon law requires that Trust Deed and Private Lending investments be suitable for each investor. These types of investments are not suggested for clients who are largely dependent on the investment return for their livelihood. A careful analysis of the investor’s cash flow needs is critical. Having enough cash reserves to be able to handle a delayed payment or potential transaction problem is also critical.
Liquidity: If you buy a corporate or government bond and need your funds before maturity, the bond can be sold through your broker and you can usually get your money within 10 days. You might have to take a loss, but the bond is considered liquid. Even Certificates of Deposit can be accessed if you are willing to pay a penalty. There is no active secondary market for Private Trust Deed Investments.
Return: Currently, our investors can expect a monthly return of around 9 to 10 percent on their investment. With other variables in the loan documents, actual returns can be higher in come cases. Depending on the type of property used as collateral, maturity dates can be as short as 1 year, although 5 years is more typical. With owner occupied residential being 30 years. Commercial offerings have much more negotiable terms. Investment sizes vary considerably, and we have transacted loans as small as $50,000 and have worked on them as high as $15 Million, although, average loan size is approximately $750,000.
OUR THREE GOLDEN RULES
There are three main criteria’s that MUST be in place before we will consider an investment offer secure enough to show to a potential investor:
First: We will not consider an offering that will require a loan exceeding 65-70% without extreme mitigating circumstances of the property’s appraised or real market value.
Second: The borrower must be able to show a documented and verifiable ability to make the monthly payments. Or, in the case of a large commercial loan, having an interest reserve can be required.
Third: The borrowers must clearly define how they will repay the balance (the exit strategy).
If all three of these conditions are met, then we will consider investigating further to see if we feel it will be suitable for our investors.
INFORMED DECISION
To make an informed investment decision, a Trust Deed investor needs to analyze certain information. When dealing with Pacific Capital Solutions Private Lending Division, you can expect a booklet with the following information:
On the property to be used as collateral:
1. What is the property’s value? State law says that we can only show you current appraised value or current County-assessed value on Residential Properties. On Commercial Properties, we sometimes use a Letter of Opinion from an experienced, qualified Commercial Real Estate Broker.
2. The status of any liens on the property: We always have a preliminary title report prepared showing any liens, encumbrances, easements or past due property taxes.
3. A “Customer Service Package” from the Title Company: This will show among other things; zoning, lot size, improvements, any outstanding property taxes and property tax history and payments.
4. Location Maps.
5. If the new loan is used to pay off an existing mortgage, then we will show the payment record on the debt. Nothing shows expected future payments quite like the current history. If that is bad, the borrower needs to have a very good explanation.
6. Photos of the property, although a personal visit to the site is highly recommended.
7. If the loan involves a sale in process, then we will provide a copy of the Earnest Money Agreement and all Addendums.
8. Banking and Investment Statements
With regards to the borrower, the investor will see the following:
1. Credit History and Credit Report
2. Current Income using pay stubs and taxes
3. Expected Income
4. Current Obligations
5. Debt-to-Income Ratio, or Residual Income after non-mortgage related debt and mortgage related debt.
6. Employment Status and History
7. Other financial resources in addition to the borrower’s equity in the property.