What is a 'Trust Deed'

A trust deed is a notice of the release of merchandise to a buyer from a bank, with the bank retaining the ownership title to the released assets. The bank remains the owner of the merchandise, but the buyer is allowed to hold the merchandise in trust for the bank, for manufacturing or sales purposes. The buyer of merchandise subject to a trust deed is required to maintain the merchandise, and any proceeds of the sale of the merchandise, for remittance to the bank. In this way, the buyer is permitted use of the merchandise for his business activities, but the bank's interest in the ownership of the merchandise is protected.

BREAKING DOWN 'Trust Deed'

Some states use a trust deed rather than a mortgage for a secured real estate transaction. The lender gives the borrower money in exchange for one or more promissory notes linked to a trust deed. The borrower transfers real property interest to a third-party trustee, typically a title company, as collateral for the promissory notes. If the borrower defaults on the loan, the trustee takes full control of the property.

Similarities and Differences Between Trust Deed and Mortgage

Trust deeds and mortgages are used in bank and private loans for creating liens on real estate. Both are typically recorded as debt in the county where the property is located. However, a mortgage involves two parties: a borrower (or mortgagor) and a lender (or mortgagee). In contrast, a trust deed involves three parties: a borrower (or trustor), a lender (or beneficiary), and a title company, escrow company or bank, called the trustee. The trustee holds title to the lien for the lender's benefit; its only function is initiating and completing the foreclosure process at the lender's request.

Mortgages and trust deeds have different foreclosure processes. A judicial foreclosure is a court-supervised process enforced when the lender files a lawsuit against the borrower for defaulting on a mortgage. The process is time-consuming and expensive. In addition, if the lender does not bring in enough money from the auction to pay off the promissory note, the lender may file a deficiency judgment against the borrower, suing for the balance. However, even after the property is sold, the borrower has right of redemption: he may repay the lender within a set amount of time and acquire the property title.

In contrast, a trust deed lets the lender commence a faster and less-expensive non-judicial foreclosure, bypassing the court system and adhering to the procedures outlined in the trust deed and state law. If the borrower does not make the loan current, the property is put up for auction through a trustee's sale. If the real estate is sold, the title is transferred from the trustee to the new owner through a trustee's deed. If there are no bidders at the trustee sale, the property reverts back to the lender through a trustee's deed. Once the property is sold, the borrower has no right of redemption.

Further, a trustee has the responsibility of paying the proceeds from the sale to the borrower and lender after the sale is finalized. The trustee will pay the lender the amount left over on the debt and pay the borrower anything that surpasses that amount, thereby allowing the lender to purchase the property. 

Trust Deed Investing

Investors searching for yield sometimes turn to the real estate sector. At its core, trust deed investing is contributing to loans with liens on real estate. In trust deed investing, the investor lends money to a developer working on a real estate project, putting the investor's name on the deed of trust. Trust deed brokers facilitate the deal between investor and developer, as banks are often reluctant to lend to certain types of developments, such as mid-size commercial, or have too many bad real estate loans due to excesses in the housing collapse of 2008. Cautious banks may also have tight lending restrictions. For these reasons, trust deed investors may often expect high interest rates that make the field even more attractive. 

Trust deed investing is associated with certain risks and disadvantages. Unlike stocks, the investments are not liquid, meaning investors cannot retrieve their money on demand. Also, investors can expect only the interest the loan generates, with any additional capital appreciation unlikely. Invested parties may exploit any legal discrepancies in the trust deed, causing costly legal entanglements that may endanger the investment. The typical investor with little experience may have difficulty investing in the sector as a certain set of expertise is required to find credible and trustworthy developers, lenders and brokers. 

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