Trust Deed: What It Is and How It Works

Key takeaways

• A trust deed (deed of trust) is an alternative to a mortgage in many U.S. states.
• It transfers legal title to a neutral third party (trustee) as security for a loan while the borrower retains equitable title and possession.
• Trust deeds typically allow faster, non‑judicial foreclosure through a power‑of‑sale clause.
• Investors can buy or originate trust‑deed loans for higher yields, but these investments are illiquid and carry legal and project risks.

What is a trust deed?

A trust deed is a legal document used in real estate financing that involves three parties:
* Trustor: the borrower who receives the loan and retains equitable title and occupancy rights.
Beneficiary: the lender that provides the funds.
Trustee: an independent third party (often a title company, escrow company, or bank) that holds legal title until the debt is repaid.

The trustee holds title as collateral for the lender. When the loan is fully paid, the trustee reconveys title to the borrower. If the borrower defaults, the trustee can sell the property under the procedures set out in the deed and state law.

Trust deeds are commonly used in roughly 20 states, including Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Tennessee, Texas, Virginia, and West Virginia. Some states allow either a mortgage or a deed of trust.

How it differs from a mortgage

Main differences:
* Parties: Mortgages involve two parties (borrower and lender). Trust deeds involve three (borrower, lender, trustee).
Foreclosure method: Mortgages generally require judicial foreclosure (court‑supervised). Trust deeds usually permit non‑judicial foreclosure if a power‑of‑sale clause is included, which is typically faster and less costly.
Redemption rights and deficiency actions vary by state and by whether the foreclosure is judicial or non‑judicial.

What a trust deed contains

Typical elements:
* Identities of the trustor (borrower), beneficiary (lender), and trustee.
Legal description of the property.
Loan terms: principal, interest rate, payment schedule, late fees.
Covenants and requirements: escrow/impound, insurance, maintenance, occupancy requirements.
Power‑of‑sale clause authorizing the trustee to sell the property on default.

Foreclosure under a trust deed

• Non‑judicial foreclosure: If the trust deed includes a power‑of‑sale clause and state law permits, the trustee can conduct a trustee’s sale without court involvement after required notices and procedures.
• Trustee’s sale: Property is auctioned; title transfers via trustee’s deed. If there are no bidders, the property may revert to the beneficiary.
• Redemption and deficiency: Rights to redeem or seek deficiency judgments depend on state law and whether foreclosure was judicial or non‑judicial. In many non‑judicial foreclosures, the borrower’s post‑sale redemption rights are limited or nonexistent.
• Distribution of proceeds: The trustee pays the lender out of sale proceeds and returns any surplus to the borrower.

Investing in trust deeds

How it works:
* An investor funds a real estate loan and becomes the beneficiary listed on the deed of trust. Interest payments provide income; principal is repaid when the loan matures or the project sells/refinances. Deals are often arranged by trust‑deed brokers.

Pros:
* Potentially high interest yields.
Portfolio diversification into real‑estate‑backed credit.
Passive exposure—no need to manage the property.

Cons and risks:
* Illiquid investment—hard to exit before maturity.
No capital appreciation (returns come from interest, not ownership gains).
Credit and legal risk if borrowers, developers, or contracts are problematic.
* Requires careful due diligence and experience to evaluate projects, titles, and loan documentation.

Common terms

• Assignment: Transfer of a deed of trust from one beneficiary to another (e.g., loan sale).
• Reconveyance: The trustee’s action returning legal title to the borrower after the debt is paid.
• Trustee eligibility: Some states restrict trustees to banks, title companies, attorneys, or other authorized entities; others allow any qualified individual or entity.

Example (typical provisions)

A standard deed of trust form may:
* Define borrower, lender, and trustee and list the loan amount and property address.
Include uniform covenants covering payment, escrow, insurance, liens, and property maintenance.
Set nonuniform covenants addressing default remedies and specific occupancy or residency requirements.
* Require notarized signatures and, in some jurisdictions, witness signatures.

Conclusion

A trust deed places legal title with a neutral trustee to secure a real‑estate loan, enabling lenders to use non‑judicial foreclosure mechanisms in many states. For borrowers, it functions similarly to a mortgage in securing credit while allowing property use. For investors, trust‑deed loans can offer attractive yields but carry liquidity, legal, and credit risks that demand careful due diligence.