Chapter 12

Pitfalls for Investors to Watch For

Although a trust deed investment is one of the safer investments you can make, it is imperative that you understand there are still risks involved.  The best way to ensure that you avoid pitfalls is to learn as much as you can about trust deed investing and everything it involves.  However, to give you an idea of some of the pitfalls you should watch out for, the following are a few tips:

  It is always in your best interest to physically inspect any real estate you are intending to invest in, even if the property has already been checked out by the appraiser, broker or title company.

  Take the time to establish your personal opinion regarding the value of the real estate collateral.  You can do this by using a number of approaches such as:

®         Ask your realtor for information on closed sales of comparable properties

®         If you were to purchase the property today, what would it be worth to you?

®         Read the appraisal

  Take the time to learn the difference between personal and real property.  You don’t want to confuse personal property for real property when you are establishing your opinion in regards to value.  Real property is that which is considered to be “affixed to the earth”.  However, don’t mistake all property that is fastened to the ground to be real property; some of these items are personal.

  You should make it a point to know how the borrower is planning to pay the private money loan.  Just because short term loans are primarily funded based on real estate equity, you should discover what the borrower has already pre-approved for their take out loan.

  When it comes to Loan to Value Ratio that concerns homes occupied by owners, you should never lend out a LTV that exceeds 60%, even if the home appears to be the most ideal of owner occupied homes.  Likewise, as far as non-owner occupied homes are concerned, the LTV should not exceed 50%

  You should never rely on future promises regarding improvements unless the proper draws for the upcoming work that is to be completed is officially set up.

  Make sure you do not want or require any final, additional documentation before you close.  Such documentation can include, but is not limited to following:

®         Certificate of occupancy

®         Well report

®         Proof of purchase cost

®         Notice of completion

®         Closing statements

®         Roof reports

®         Toxic reports

®         Sign off of final permit card

®         Etc.