How a Deed of Trust Protects a Private Lender
A recorded Deed of Trust is what turns a promise into a secured claim on a specific property. Here is what it does, and what it does not do.
Key Financial Group
The short version: A Deed of Trust is a recorded legal instrument that pledges a specific property against a loan. It converts a borrower's promise into an enforceable claim with a place in line. It does not make you the owner and it does not guarantee an outcome.
The difference between a promise and a claim
If someone borrows money from you and agrees to repay it, you have a promise. If they do not pay, your recourse is to pursue them as an unsecured creditor, alongside everyone else they owe.
If instead a specific property is pledged and that pledge is recorded, you have something considerably stronger. You have a documented interest in an identified asset, with a position in the order of who gets paid.
That is the entire function of a Deed of Trust. It moves you from the first situation to the second.
What the document actually does
It names the property
Not property in general. A specific parcel, identified by legal description and address. That specificity is what makes the claim enforceable.
It is recorded publicly
The instrument is filed with the county where the property sits. Recording is what makes the claim effective against other parties, and it establishes when your interest arose relative to anyone else's.
It establishes priority
Recorded interests sit in an order. That order determines who is repaid first if the property is sold or liquidated. We cover this in understanding lien position.
It sets out what happens on default
The document specifies the process if the borrower fails to meet the obligation, including how the security can be enforced. Those procedures vary by state and they are part of what you are relying on.
Deed of Trust or mortgage
Both create a security interest. The difference is structural and largely determined by which state the property is in.
A mortgage is a two party arrangement between borrower and lender. A Deed of Trust involves three parties, with a neutral trustee holding title on behalf of the lender until the loan is repaid.
For a lender the practical protection is broadly similar. The processes on default differ, and in some states the Deed of Trust route is the more straightforward one, which is part of why it is widely used.
Certification, and why it is mentioned
Under the Private Lending program, each loan is secured by a certified Deed of Trust and/or Mortgage Note on a specific residential property owned by the developer.
Certification and recording are what take the arrangement out of the realm of assurance and into the realm of documentation. You should expect to receive copies of the instrument that secures your loan, and to be able to identify the property it names.
If a private lending arrangement cannot show you a recorded instrument naming a specific property, that is not a paperwork delay. It is a description of a different and weaker arrangement.
What it does not do
This is where care is warranted, because security is often described as though it were certainty.
It does not guarantee full recovery. A recorded claim gives you standing and a position in line. What that position is worth depends on what the property is worth and who else has a claim ahead of you.
It does not make you an owner. No rent, no appreciation, no control over the property. You are a lender with security.
It does not make the loan liquid. The instrument protects your claim. It does not give you a way to get your money back before the term ends.
It does not remove the value of the borrower. In a well run programme, the security is a backstop rather than the plan. The plan is that a solvent, competent operator pays as agreed. Under the program, interest is paid from all of the developer's income sources rather than only the collateral property, and is backed by a promissory note.
That last point deserves emphasis. Judging any private loan mainly on the collateral, while paying little attention to who is borrowing, gets the emphasis backwards.
The risks, stated plainly
- Your funds are not liquid during the term.
- This is not a bank product and is not FDIC insured.
- Real estate values can change.
- Interest rates can change at renewal.
- Past performance does not indicate future results.
What to ask for
Ask for a copy of the recorded instrument. Ask which property it names and confirm you can identify it. Ask what lien position you hold and what sits ahead of you. Ask what happens if that property is sold. And ask who the trustee is, where a Deed of Trust is used.
None of these are awkward questions in a well run programme. They are the ordinary questions of someone doing sensible work, and the answers should come readily and in writing. Our full list is in questions to ask before you become a private lender.
If you would like the documentation walked through with you, schedule a free consultation. You are welcome to bring your own attorney into that conversation, and we would encourage it.
This article is for general education and is not financial, tax, or legal advice. Please speak with a licensed professional about your situation.
