Introduction – What is a Trust Deed?
A trust deed is referred to as a document that is used in certain real estate transactions. This document is mainly created in instances when a party loans a certain amount of finance from another party to purchase a certain property.
In this case, it can be seen that the trust deed represents an agreement drawn between the borrower and the lender to hold the property in trust (with someone who is neutral) till the point when the loan is paid off.
Hence, it can be seen that the Trust Deed is mainly drawn in real estate transactions. The underlying purpose of the trust deed is to transfer the legal title of the property to a given third party, till the point where the loan is paid off to the lender. Trust Deeds are also used as alternates to mortgages in certain places. It can also be used as a high-yielding income stream.
Why is a Trust Deed Drawn?
The underlying reason behind a trust deed can be referred to as collateral, or a ‘formation of trust’ between both the parties. It helps the lender securitize his loan, and the borrower to get better terms against the trust deed.
This helps in restoring confidence between both the parties, and hence this is essential to carry out transactions in a smooth manner.
How do Trust Deeds work?
As mentioned earlier, it can be seen that trust deed transfers the legal title to the real property to a trustee, who acts as a neutral party. This is typically a title company, a bank, or an escrow company.
However, in the case of a trust deed being drafted, it must be noted that the equitable title of the borrower remains with the borrower. He is also entitled to the full use and responsibility of the borrower.
The trust deed holds to the point where the debt is paid in full. After the debt has been settled, it can be seen that the trust deed no longer holds, and the property is then legally transferred back to the borrower. However, in the case where the borrower is unable to pay back the loan, the trustee is entitled to the property.
Advantages and Disadvantages of Trust Deeds
Trust deeds are drawn in order to protect the interests of the lender, in the presence of a neutral trustee, who can act as a confidante between both the parties.
The greatest advantage of the trust deed being drawn is the fact that it offers a high yielding income stream, as well as portfolio diversification. This is because for both, the trustee, as well as the lender.
The returns offered as a result of the trust deed are quite attractive. It also inculcates for risks, and other relevant returns, that can result in a diversified portfolio. This diversification has numerous advantages from the perspective of the investor, because of which it continues to be in demand.
However, regardless of the advantages of trust deeds mentioned above, it can also be seen that there are a couple of disadvantages that need to be taken into account. Firstly, it can be seen that there is a problem of illiquidity.
This means that investors are unable to retrieve their money when they need it. They need to wait for the end of the term to get the return back. In the same manner, capital appreciation is also not accounted for in the overall process, because of which investors cannot expect an increase in interest payouts over the course of time.
In the same manner, for investors who are relatively new in the development landscape, it might be a time-consuming process to find credible brokers and borrowers that can help them achieve their required targets without adjusted risk.
Therefore, it can be seen that the trust deed is regarded as a fundamental process that enables one to connect the borrower (mostly the developer), and the investor with a neutral trustee in between.
In this regard, the main aim of the trust deed is to provide security to the lender regarding the funds that he is investing, so that there are no entanglement issues further on in the agreement.
In the case where the borrower fails to pay back the money, the trustee is entitled to get the equitable right from the property against which the trust deed is drawn.
Therefore, it is important to ensure that this particular aspect helps to bridge the difference between the investor and the borrower.