A trust deed issued by sellers of properties as part of purchase transactions is called a purchase-money trust deed investment. This can also be referred to as seller financing or owner financing, and it is often used when a buyer cannot qualify for a loan from a traditional lender.
It can be used when the buyer assumes the seller’s trust deed, and seller financing makes up the difference between the balance on the assumed trust deed and the sales price of the property.
In relation to other liens incurred by a borrower prior to the date of purchase, a purchase money deed of trust is accorded the highest priority.
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The Basics of a Purchase-Money Trust Deed
As long as a trust deed in real estate records against property and secures all or part of the purchase price, the deed will be deemed a purchase money deed of trust.
Traditional trust deeds differ from purchase-money trust deeds. A down payment is provided to the seller instead of a trust deed, and a financing instrument is given as evidence that a loan has been obtained.
When the lender accelerates a loan due to an alienation clause, the property’s trust deed is relevant only if the loan was already accelerated.
In the case of a clear title, the seller and buyer can agree on a rate of interest, a monthly payment, and the term of the loan. Payment for the seller’s equity is made in installments by the buyer.
When Can a Purchase Money Trust Deed be Best Used?
Purchase money trust deeds are used by buyers to give the title of the property to someone else. While this may seem odd, there are a few reasons why it may be necessary.
There are many reasons why a purchase money trust may be used, including inheritance rights. Those in domestic partnerships, for instance, might want to set up a purchase money trust deed for their assets. The surviving partner will automatically transfer both the title and ownership of the property if the partner holding the title dies—since they originally paid for it.
There are some states that recognize domestic partnerships and grant survivorship or inheritance rights to couples in them, but not all. When there is no statute regarding purchase money trust deeds, domestic partners may form one in order to ensure that their partner inherits the property upon the death of the other partner.
It is also possible to gain certain tax benefits from the property if a party uses a purchase money trust deed. Keeping the buyer’s name off the title, for example, may reduce the value of their estate, resulting in lower estate taxes during probate.
Last but not least, purchase money trust deeds may also be formed for the purpose of making loans to individuals who are ineligible for traditional trust deed loans.
Purchase-Money Trust Deed Benefits for Buyers
Sellers are typically more flexible than conventional lenders when it comes to their criteria for a buyer’s qualifications — even when they request a credit report on the buyer. There are several payment options available to buyers, including interest-only, fixed-rate amortization, less-than-interest, or balloon payments.
There can be a combination of payments, and interest rates may periodically adjust or remain constant based on the borrower’s needs and the seller’s discretion.
The down payment can be negotiated. Buyers may be able to make periodic lump-sum payments toward a down payment if a seller requests a larger down payment than they have. In addition, closing costs are lower in trust deed investing.
In the absence of an institutional lender, there are no loan origination points, discount points, processing fees, administration fees, or other types of fees lenders routinely charge.
Furthermore, since buyers are not waiting for lenders to approve financing, they can close faster and receive possession earlier than with conventional loans.
Purchase-Money Trust Deed Benefits for Sellers
When investing in trust deeds, the seller may receive the full list price of the home or even more in exchange for providing a purchase-money trust deed. An installment sale may also result in a lower tax bill for the seller.
As a result of the buyer’s payments, the seller may also have more spendable income at the end of each month. It is also possible to lock in a higher interest rate with a seller than with a money market account or another low-risk investment.
Trust Deed Advice from Professionals
When working with trust deeds, it’s critical to work with professional companies whether you’re buying or lending money. In these transactions, there are significant financial interests at stake, and vulnerable parties need to be protected.
We are happy to assist you with any questions about trust deed loans and real estate. You can reach out by sending us an email at info@saintinvestment.com or calling us at 949-881-7128 at Saint Investment Group today!
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President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.
