A deed of trust is a document that secures a promissory note, which is essentially a loan against real estate. When a person borrows on a property, they sign a promissory note which has all the details of the loan such as loan amount, interest rate, and payment schedule. A deed of trust is also signed which is the legal security for the promissory note. If the borrower doesn’t make payments as stipulated in the promissory note, the person holding the deed of trust can foreclose on the property.

Since the underlying security of the deed of trust is real estate, the investment is secure as long as there is equity in the property. Individuals often have a first trust deed with a traditional lender and a second trust deed with an individual who has loaned them money. For example, a second deed of trust recorded on a property might look like the following:

Property Appraised Value:                                             $275,000

First Deed of Trust Recorded Against the Property       $100,000

Second Deed of Trust Recorded Against the Property:  $  50,000

Total Equity ($275,000 minus $150,000)                           $125,000

In this scenario, the second deed of trust lender (who loaned the borrower $50,000) may want to sell the deed of trust in order to free up some money. This presents an attractive investment opportunity for someone who is willing to buy the deed of trust for the following reasons:

• The $50,000 promissory note probably has an interest rate that is much higher than the prevailing rates in typical bank investments such as money market accounts or savings accounts. For example, the deed of trust might be securing a note with an interest rate of 8 percent compared to a bank’s money market rate which might be 2 percent.
• The borrower is probably making payments on the loan which generates income to the person who is willing to buy the note. For example, if the interest rate on the promissory note is at 8 percent, and paid as “interest only,” the investor would receive monthly payments of $333.33 ($50,000 times 8 percent interest, divided by 12 months.)
• If the borrower were to stop making the payments on the note, the investor could foreclose on the property which means they could end up owning the property, and with it, acquire $125,000 in equity.
• In some cases, the individual selling the deed of trust, might need money quickly, in which case, he would be willing to sell the note at a discount. A discount means the buyer of the note would pay less than the face value of the promissory note. In the example above, the buyer might pay $45,000 for the note. This is an additional incentive for the buyer.

Buying a deed of trust can be a good investment; however you need to take the following steps before making the purchase:

1. Obtain a preliminary title report from a title company which clearly shows all the deeds recorded on the property and that there is a clear record of title. In other words, identify the owner (borrower) on the property as being correct and accurate. The title report will also identify the holder of the first trust deed (if any) and also whether or not the property is in foreclosure or has any other liens recorded against it such as an IRS tax lien.
2. Order an appraisal that shows how much potential equity there is in the property. This is extremely important, because the security of the deed of trust is based on the value of the property.
3. Verify the existing payment history of the borrower who is making payments on the note.

Once you have verified all the pertinent information on the property, you can open escrow with an escrow company who will facilitate the sale of the deed. The party selling the deed will need to sign an “assignment of the deed of trust,” and this will be held by the escrow company until you put your funds into escrow to buy the deed of trust. Once escrow has received your funds, they will record the assignment of the deed of trust at the county recorder, which officially puts the deed of trust into your name.