“The banks aren’t paying anything,
when it comes to interest.”
Investors are tired.
Year after year of almost no returns from bank
interest mean they are not seeing the benefits they planned on as they worked and saved the money. Carefully selected trust deeds can provide a way to earn more interest income and build an investment portfolio.
Trust deed investments are secured by real estate. Most investors want to invest
in first trust deeds. California first trust deeds are usually larger loans than
second trust deed investments. If the real estate is located in a mid-priced to
better area, the amount of the trust deed offered for investment may
again, be larger.
This brings us to fractionalized trust deed investments.
We frequently close hard money loans for apartment buildings. We just closed a first trust deed secured by a small apartment building. The loan amount - $188,500. There are
two ways private money investors could have participated:
- One "whole loan" investor could have put up the entire $188,500, and been the sole owner of the trust deed.
- Or, various investors could have acquired smaller interests in what we refer to as a fractionalized trust deeds or fractionalized loans. (This is what happened.)
- There are other ways to offer trust deed investments in California, but we’ll cover just “one-investor”
investments as in the first bullet point, and as described in the second bullet, “fractionalized trust deed investments”.
What you should know: How do people get together and invest in one or more private money loans?
I'll cover some
common steps, but bear in mind that nothing said here represents an
“industry standard,” a "standard of care", or “the only right way” to do this. What I’ll
describe is one common method of creating multi-lender loans. Here are the
- The loan broker or trust deed investment company, usually a licensed private money lender or other properly licensed entity, finds a loan opportunity. These are generally referred to as California first trust deed investments, assuming they’re first trust deeds.
- California trust deed investment companies or loan brokers either fund the loan with their own money, or present the loan to investors, and the investors place funds into the escrow to close the loan with the borrower.
- The loan broker enters into a loan servicing agreement with the investors, agreeing to collect
payments, disburse amounts to investors, monitor tax and insurance payments, and
provide required year-end reporting.
- Instead of handling the loan servicing, the broker may have the investors enter into an
agreement with an independent third party loan servicing company, who performs the
note collection duties.
- In the event of delinquency or default, the broker or servicer notifies the investors, and upon
their agreement, instructs the foreclosure trustee to begin foreclosure proceedings, etc.
- In most cases, there are few, if any “decisions” that have to be made by the investors. Generally, a majority of interests of the
investors, (51% or more) will determine what action is taken.
Why? What are the advantages to investing in a fractionalized trust deed?
- Impact of a delay in payment, or non-payment by a borrower, or other collection problems is
generally reduced by spreading the same amount of money over several trust deeds, rather
than having a larger amount invested in one trust deed.
- If you have $90,000 invested in one trust
deed and it pays off, you are completely “un-invested” until you find more trust deeds. When your funds are invested in several trust deeds and one pays off, you only lose the interest income on that loan.
- More time to investigate, ask questions, think and decide: A fractionalized trust deed, funded by the
broker in advance, provides you more time to review and consider
Fractionalized trust deed investments can have problems. It’s
important to consider that there are risks.
These may include, among others:
- Investor disagreement: Although the holders of a majority in interest in fractionalized trust deed investments (fractionalized loans) would make certain decisions about the investment, there are instances where investor disagreement could cause delays or challenges.
- Failure of one or more investors to advance funds that may be needed to cure a property tax
default, or to their failure to advance other funds needed to protect the investment.
- Difficulty in selling interests in fractionalized trust deed investments: Should someone want
the funds back prior to the loan paying off, a share of a loan will be difficult or impossible to
This is not an offer to sell securities, or an offer or solicitation to
invest in any trust deed, or in trust deeds in general. Trust deed
investments carry risk and are not guaranteed or insured. Joffrey Long
is not an attorney, and this should not be considered as legal advice.
Anyone engaging in any of the acts described in this writing should
consult with a qualified attorney. Before considering any investment in
trust deeds, you should carefully investigate a number of areas, among
- The suitability of trust deeds as an investment for YOU, based on your circumstance
- Trust deeds in general, the risks, disadvantages and limitations
- The provider, trust deed investment company, or broker who is offering you the investment
- The specific California trust deeds or type of fractionalized trust deeds (fractionalized real estate loans) being offered, and their suitability to your
Joffrey has owned and operated Southwest Mortgage since 1986. He is a
Past-President of the California Mortgage Association, its current
Education Chair and a member of its Board of Directors. Joffrey teaches
National Mortgage Licensing System continuing education courses for
loan originators, and is called upon from time to time to testify as a
mortgage expert witness or loan servicing expert witness.
17045 Chatsworth Street
Granada Hills, CA 91344-5845
(818) 366-5200 firstname.lastname@example.org
California Bureau of Real Estate Broker License Number 00898122
You can obtain other information about trust deed investing at: