When investing in trust deeds, good old-fashioned due diligence is one of the key ways to mitigate the risk in such an investment. From reviewing the borrower’s credit report thoroughly to scrutinizing the appraisal on the subject property, a thorough review of all the documentation involved in trust deed investments goes a long way towards understanding your transaction better. Unfortunately, even the most thorough due diligence cannot guarantee that a payor or borrower will continue to perform per the terms of the note and trust deed for the duration of the loan. The most common problem with trust deed investments is when a borrower stops making payments. While the typical response is to initiate foreclosure proceedings, this can be both a time-consuming and costly process. Thankfully, there are other ways to attempt to keep your investment in good standing before foreclosure has to be considered.
Communication – Keep the Door Open
One method of keeping the investment alive that benefits both parties is to keep the lines of communication open with the borrower (and it takes both parties cooperating to make this work). Not only will doing this ensure that you stay informed about the status of payments, but it will also let you know more information about the borrower and perhaps let the borrower know you might be able to work out a solution. However, without open communication, a non-paying borrower can quickly make the process more strained which typically leads to foreclosure.
While difficult for lenders, it is important to give the benefit of the doubt to the borrower if a payment is missed. Notifying them of a missed payment without being accusatory will go much farther than the alternative of being heavy-handed. Additionally, often the borrower can have a very legitimate reason for non-payment which may only be temporary but out of their control, something you may never know if you take the accusatory approach.
Promissory Note Inclusions
Many times, prevention is the key to keeping trust deed investments in good standing. Every trust deed investor has the right to expect payments to be made on time. Make sure your promissory note has this language. Additionally, some investors like to use default rates of interest as well as late fees. Often times these types of conditions in the promissory note can be all it takes for a borrower to maintain the loan in good standing, as many borrowers try to avoid incurring these extra fees in connection with the loan.
Refinancing As an Option
Often times life can take a twisting road. Jobs can be lost, health can decline, family needs can change. Should one of these occur with your borrower, foreclosure is not the only option. Indeed, many investors will often modify the payments for their borrower for a few months or agree to a larger loan modification of the entire promissory note depending on the equity in the subject property; this can often be a better alternative to foreclosure. The good news about these options is that the change does not have to be for a long term; a modification of one year or less may suffice to help the borrower resume their schedule of regular payments under the original note’s payment terms.
Hire a Professional
If you manage more than one property or trust deed, or simply don’t have the time or the inclination to deal with borrowers personally, you may be able to get the help you need by researching and engaging specialized loan servicer companies and/or loan brokers that have loan servicing departments like Val-Chris Investments, Inc. who has been performing the loan servicing function for over 25 years. Loan servicing professionals such as these are adept at borrower communications and procedures, as well as trust deed investment management. Also, these professionals have the time to invest to create and nurture the borrower/investor relationship, which will only benefit you over time.