Buying a note and trust deed is an alternative investment option for certain individuals interested in seeking additional income over a fixed period of time. Interested parties should always look for the safest ways to approach the high-earning yields on trust deed investments for a more in-depth understanding. With that in mind, here are eight smart tips everyone should follow when considering trust deed investments:
- You should always be the one to personally inspect the real estate you’re going to lend money; do this even if the broker or the title company has already taken a look at it.
- Take some time to think about the value of the real estate collateral and make sure you have more than one indication of the market value. To do this, read the appraisal and then ask your realtor for any kind of information about closed sales on similar properties. Also, it’s better to ask yourself what it would mean for your situation to buy it today.
- Always remember to use the actual purchase price as the value of the property — after all, in most cases there isn’t a better indicator of a property’s value, other than the price it actually sold for.
- Differentiate between the real and the personal property — especially if you’re the one trying to determine the property’s value. Not doing so can lead to incorrect valuations.
- Find out if anyone asked the borrower how he actually plans to repay the loan, even if it is a short-term note. We know that private money loans are approved on the basis of the real estate equity, but it is important to see that the borrower actually has a plan for repaying all the money back.
- You should never lend more than a 60% loan-to-value (LTV) ratio — and that is only for the most prime owners of occupied homes. Likewise, you should never lend more than a 50% LTV for non-owners of occupied homes.
- Always ensure that you check out the property yourself to see if there are any adverse conditions that can affect the property in any way, because that may not be revealed in the records, or exposed during a home inspection. It’s also a good idea to poll neighbors for potential adverse conditions that may not be readily apparent.
- Ensure that you only use existing improvements to determine the present value of the property; do not take into account any promised or proposed soon-to-be enhancements as collateral today. You should never rely on any improvements which are promised to be made in the future, unless the proper plans and paperwork has been filed to complete the work.
Photo Credit: MarkMoz12
Question of the Week