Trust Deed – Definition

Cite this article as:"Trust Deed – Definition," in The Business Professor, updated September 10, 2019, last accessed September 25, 2020, https://thebusinessprofessor.com/lesson/trust-deed-definition/.

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Trust Deed Definition

Trust deeds or deeds of trust are documents used in the United States for real estate purpose. Trust deeds are primarily filed when a person or group takes a loan from a lender to buy a property (mostly landed properties). Trust deeds are agreements between borrowers and lenders to assign third parties with the management of property for which the loan was taken till it is paid.

Trust deeds are less common than they used to be since mortgages have replaced them, but they’re still applicable in 20 states in the U.S. They are mostly used in Alaska, Arizona, California, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Tennessee, Texas, Virginia, and West Virginia. Some other states make use of both trust deeds and mortgages like Kentucky, Maryland, and South Dakota.

A Little More on What is a Trust Deed

Trusts deeds are mainly used in real estate transactions. Here, a lender gives a borrower money to purchase a property, and in exchange, the borrower is to submit a signed document with a written promise to pay on or before a specified date linked with the deed of trust. This deed then confers the legal right to the property to a third party (a trustee like an escrow firm, or a bank), which holds it as collateral for the lender’s written promise which is the loan’s security. Thus, the borrower is granted the right to obtain and use the property, as well as ownership and responsibility of the property in agreement. The trustee will continue to hold the right to the property until the borrower pays the loan in full. When this happens, he or she is granted the right to the property, without further supervision from other parties. However, if the borrower defaults on payment or any additional agreement, he or she will be stripped of his or her right to obtain and use the property, and this right will be transferred onto the trustee (the third party escrow firm or bank).

Important Details

  • Trust deeds transfer the legal right of a real estate property to a trustee, which will only be released to the borrower on the completion of the loan.
  • Some states in the U.S use deeds of trust as an alternative to mortgages
  • Trust deeds are generally good investments with possible high returns

Differences between Mortgages and Deeds of Trust

Deeds of Trust and Mortgages are similar in the sense that they are used in bank and private loans to create liens (a situation where a trustee is allowed to keep a property till the loan used to purchase that property has been paid off) on landed properties. Both documents are recorded as debts in any country where the real estate is located.

The difference between both agreements is the number of parties involved. In a trust deed, the parties involved are three in numbers: the trustor (borrower), the beneficiary (lender), and the trustee (escrow firm or bank). On the other hand, a mortgage involves just two parties: a mortgagor (a borrower), and a mortgagee (the lender). There is no need for a trustee in mortgages. The trustee in a trust deed is conferred with legal rights to the property, where they hold the property’s lien. If the borrower defaults, this trustee will have to conduct the foreclosure (taking full ownership of a mortgaged property in a case where the mortgagee or trustor in trust deed default on the payment of loan) to the benefit of the lender.

Deeds of Trust and Foreclosures

Foreclosure processes are different in trust deeds and mortgages. In a mortgage, foreclosures are usually conducted via a judicial proclamation, where the mortgagor has to file a suit against the mortgagee for defaulting on the loan. The lender can also file a deficiency judgement against the borrower in a case where the foreclosed-property auction doesn’t raise enough money for paying off the written promise. Here the main aim is to get the balance to eradicate loss. However, the borrower is also granted a right to redemption, a situation where he or she is allowed to regain the rights to the sold property after paying off the lender in a set period of time. Mortgages foreclosure processes can be time-consuming and expensive.

On the other hand, trust deeds speed up the foreclosure process as both the beneficiary and the trustee don’t need to go to court. State laws and contracts binding both parties are the only things needed to call in a foreclosure. The trustee has the right to auction the property if the trustor cannot come up with the loan amount after the repayment deadline. When this happens, the trustee becomes the real and full owner of the property, a title which was formerly shared with the trustor. In a case where the auction doesn’t yield a positive result, the trustee is required to submit the rights to the property back to the lender. Unlike mortgages, borrowers have no chance of getting these properties back.

In a situation where the auction is successful, the trustee is required to pay both the borrower and the lender the amount received from the sale. He is to pay the lender the remaining amount from the debt, and the borrower is allowed to take whatever remains from the money after the lender has been settled.

Advantages and Disadvantages of Trust Deeds

Most investors have been drawn to the returns from trust deeds as well as the real estate sector in general. The most common instance is when an investor borrows a construction firm or developer money to start building a property. In the trust deed, he or she is referred to as the beneficiary and receives interest as well as the initial loan given at the end of the loan cycle. Here are the advantages and disadvantages of trust deeds.

Advantages

  • High Investment Returns
  • Investment/Portfolio Diversification

Disadvantages

  • No liquidity
  • Principal is stagnant (doesn’t appreciate nor depreciate)

Trust deeds investors take advantage of medium-sized project developers inability to secure loans from banks and smaller investors. This investment can prove to be highly profitable, as interest rates are unusually high (due to frustration on the part of developers to get a loan). Trust deed managers usually don’t need to have knowledge of the real estate sector, and this makes it a valid passive investment with abnormally high returns.

It is, however, important to note that investing in trust deeds has its cons as well as its pros. Investors cannot have their money on demand, as the real estate sector possesses only illiquid assets (assets in forms of property that cannot be sold in a timely manner). Also, unlike the stock market, capital doesn’t appreciate, and interests are the only means of profits. It is also a hassle finding awesome developers and projects, as investments can fly into thin air in a situation where a developer takes advantage of loopholes in the trust deeds. Thus, it is recommended that investors have even a little knowledge of this sector to avoid negative returns.

Illustrations of Trust Deed

In Austin County, Texas, a trust deed contains the requirements for all lenders. The front page states the terms of the loan, as well as provide spaces for each party to sign if in agreement. This deed also contains a space to fill in the amount of the loan, and the address of the property in question. This form also contains pages which highlight the conditions for the transfer of rights. The form also specifies the conditions which explain the default of the contract terms. It also provides a disclaimer which informs the borrower that the loan is not given in cash, but in the form of the property in question.

References for “Trust Deed

https://www.investopedia.com › Personal Finance › Home Ownership › Mortgage

https://en.wikipedia.org/wiki/Deed_of_trust_(real_estate)

https://www.thebalance.com › … › Home Buying › Market Facts & Trends

Academic research for “Trust Deed

The Trust Deed Act in Washington, Gose, J. A. (1966). The Trust Deed Act in Washington. Wash. L. Rev., 41, 94.

A Forgotten Chapter in the Early History of the Corporate Trust Deed, Smith, J. G. (1927). A Forgotten Chapter in the Early History of the Corporate Trust Deed. Am. L. Rev., 61, 900.

Fiscal agency or trust deed, Smart, A. M. H. (1982). Fiscal agency or trust deed. Int’l Fin. L. Rev., 1, 18.

Foreclosing on Nothing: The Curious Problem of the Deed of Trust Foreclosure Without Entitlement To Enforce the Note, Whitman, D. A., & Milner, D. (2013). Foreclosing on Nothing: The Curious Problem of the Deed of Trust Foreclosure Without Entitlement To Enforce the Note. Ark. L. Rev., 66, 21.

The Deed of Trust: Arizona’s Alternative to the Real Property Mortgage, Lawyer, G. E. (1973). The Deed of Trust: Arizona’s Alternative to the Real Property Mortgage. Ariz. L. Rev., 15, 194.

Enforcing the Oregon Trust Deed Act, Dunne, J. L. (2012). Enforcing the Oregon Trust Deed Act. Willamette L. Rev., 49, 77.

Does the Turquand rule apply to internal requirements in a trust deed, Beukes, H. G. J. (2004). Does the Turquand rule apply to internal requirements in a trust deed. S. Afr. Mercantile LJ, 16, 264.

The Wrap-Around Deed of Trust: An Answer to the Allegation of Usury, Arditto, M. A. (1979). The Wrap-Around Deed of Trust: An Answer to the Allegation of Usury. Pac. LJ, 10, 923.

Tennessee and the Installment Land Contract: A Viable Alternative to the Deed of Trust, Skow, R. L. (1990). Tennessee and the Installment Land Contract: A Viable Alternative to the Deed of Trust. Mem. St. UL Rev., 21, 551.

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