Just like there is inherent
danger in knowing the value of a business and its stock before investing in it,
there is also danger in determining the worth of a property that you consider lending
on as a private lender. The benefit you have as a private lender (deed of trust
investing) who is lending money secured by a real estate property (which buyers
in the stock market do not have) is the ability to invest with a margin of
safety. Through a margin of safety, the risk to uncertain real estate property
valuation is minimized.
As with property inspection, do
not skip the important stage of inspecting the property prior to funding a deed
of trust investment. By ocular inspection of the property, you will have an
idea of the property value and compare it with other appraisal reports. Viewing
the home soon after a default is crucial way too, but it is no substitute.
When inspecting the property, you
should focus on two queries: One is how much is the home value? Second, how
easily could I sell the property if I took it back by foreclosure? There are
other things to consider too such as ownership and structural issues which
could be very expensive to resolve. Hence, it is very important to
follow the correct LTV (loan to value) ratio as this will give a cushion to
your deed of trust investment.
Having the time to understand the
appraisal of the real estate property that you are lending money on is indeed a
prudent course of action in a deed of trust investment. Investing in a deed of trust can
be a wonderful alternative investment where you get a nice fixed rate of return
and the security it gives as being an an asset that is worth more than the
amount you are lending.
