4 Key Components to Trust Deeds
Here are the four key components we look for in underwriting when evaluating and committing to a trust deed:
1. A good property. It all starts with the right property. We look for easily marketable ones in good locations that fit well within the current market.
2. A good borrower. We look for borrowers who have good “character,” meaning they have a nice track record of making payments, know what they’re doing, and maybe have some experience already. Then we look to see if they have good credit and reserves, meaning they have money in the bank and/or assets they can draw upon if necessary. We need to know they have some money behind them.
3. Good loan-to-value ratio. This means we want the borrower to have skin in the game, which either means they’re making a down payment, or if they already own the property, we look at its present value and the maximum loan amount we would allow. We usually won’t commit to more than 65% of the value. As an example, if the property is worth $100,000, we typically wouldn’t lend any more than $65,000 for it.
4. An exit strategy. Generally, our loans are short term, so we need to know their exit strategy. Will they resell, refinance, or have the ability to refinance? Essentially, will they be able to take a loan out with us and eventually pay us back?
If you don’t have these key components, we can’t write you a loan. We look for those four things to ensure our investors’ money is protected and that we’re going into a deal that meets all our guidelines.
If you’re interested in learning more about investing in trust deeds or have any questions, give me a call. I would love to be a resource for you.