- A deed of trust is a legal arrangement that allows a real estate buyer to finance a purchase by making regular payments to the seller. The property is placed in the care of a trustee and used as collateral for the loan.
- Deeds of trust offer extra security and an easier foreclosure process for sellers. Buyers enjoy lower closing costs.
- You can sell your right to collect payments for a deed of trust in exchange for a lump sum payment.
What Is a Deed of Trust?
When a buyer and seller agree to use a deed of trust for a property sale, they find a trustee to be a neutral third-party. Trustees are usually corporations, often a bank or real estate company, but individuals can also be trustees. Your lender may even serve as the trustee.
The trustee does not receive payments from the borrower or make payments to the lender. The trustee’s only job is to hold onto the property until the loan is paid.
You can use a deeds of trust to purchase real estate, to refinance an existing mortgage note or to tap into home equity.
How Deeds of Trust Work
Deeds of trust are one way for a property owner to finance real estate transactions. Sellers who use a deed of trust agree to lend the buyer the money they need to purchase the home, becoming their lender. The buyer then signs a promissory note pledging to repay the borrowed amount. The trustee assumes control of the home to secure the loan.
Borrowers in a deed of trust arrangement make payments directly to their lender, usually not a financial institution. If the borrower defaults on the loan, the trustee can sell the property to reimburse the lender.
Many benefits come with conducting real estate transactions using a deed of trust. Lenders enjoy the extra security these contracts provide, while buyers enjoy lower closing costs. It’s also quicker and easier for lenders to initiate a foreclosure process if the borrower does not make payments on time.
There are also several drawbacks to buying and selling property this way. The trustee has control over the property while the contract is active, restricting the borrower’s ability to amend the property they purchased. The trustee also has significant influence over the foreclosure process and may make dispute resolution difficult.
Deeds of trust also have a higher potential for fraud than simple mortgage contracts. This is why many states have switched to using mortgages for real estate transactions instead. Deeds of trust may not be available in your state.
Deeds of Trusts vs. Mortgages
Deeds of trust and mortgages are both legal contracts used to secure loans for real estate transactions. They’re also both public records, available for others to see. They’re often governed by different laws, depending on the state where the purchase took place.
There are also many significant differences between the two. They include:
- Parties involved. A mortgage involves a contract between the buyer and the bank that the buyer uses to finance a real estate purchase. A deed of trust involves the buyer, the buyer’s lender and the trustee that holds the property until the loan is paid in full.
- Availability. Because deeds of trust are less common than mortgages, you may have a harder time finding someone who wants to buy or sell property this way.
- Ownership of the property. A deed of trust stipulates that neither the buyer nor the seller owns the property involved in the transaction until the loan is paid off. The trustee is the sole owner of the property during the amortization period.
- Foreclosure process. Deeds of trust don’t have to go through a legal foreclosure process. If the borrower misses a payment, the trustee has the right to sell the property.
- Flexibility. Deeds of trust can include any stipulations the seller and buyer mutually agree to.
- Fees. Real estate transactions conducted using a mortgage often come with high closing costs. Using a deed of trust eliminates many of these costs.
How To Sell Your Deed of Trust
There are many reasons you might consider selling your payments. You might need immediate cash flow to pay off debts or make another purchase. Or you may want to diversify your investment portfolio. Alternatively, you might not want to shoulder the responsibility of collecting payments or the risk of non-payment from your buyer.
You can sell your deed of trust after your borrower has signed for their loan. If you sell, you’ll receive a lump sum payment, but won’t be eligible to collect future payments from your borrower.
Follow these four steps to complete the sale:
- Contact a real estate attorney or broker who specializes in these sales. Ask about any potential legal implications of selling your payments and ask for help completing the transaction.
- Negotiate the purchase price and any other contractual details with your buyer. Determine the amount of monthly payments, how long the amortization period will be and how much monthly interest will get added as part of the loan.
- Get the mutually signed contract notarized.
- Have an escrow company or an attorney manage the transaction and transfer of ownership. This third party will execute the transaction, as well as collect and disburse any money that changes hands.
Once the transaction is complete, the buyer becomes the new beneficiary of the deed of trust. This gives the buyer the right to collect any payments owed on the property.