When is it time to use a trustee deed?

A deed is a document that conveys ownership in real property. There are several different kinds of deeds, one of which is a trustee deed. Buying a home with a trustee deed can offer you a great deal, but it's important to be aware of the drawbacks to this kind of conveyance.

Howa trustee deed works

A trustee deed—sometimes called a deed of trust or a trust deed—is a legal document created when someone purchases real estate in a trust deed state, such as California (check your local laws to see what is required in your state). A trust deed is used in place of a mortgage. A person (the lendee) buys a home and finances it through a bank (the lender). A third party—the trustee, usually an escrow company—legally holds title to the home for the lender as security against the loan.

If the buyer defaults on the loan—that is, doesn't pay it back—the trustee is allowed to do a nonjudicial foreclosure. This means they don't have to go to court and can foreclose on the home directly. The home is then sold to satisfy, or payback, the loan to the bank. The person who buys the home at the sale receives a trustee deed at the time of purchase.

Differences from other deeds

A trustee deed is different from other kinds of releases in the following ways:

• A quitclaim deed transfers ownership of the property from seller to buyer with no guarantees or promises. This means there may be other outstanding loans against the property that will pass with it, putting the new owner on the hook for them.
• A warranty deed provides a guarantee that the title is clear. A trustee deed offers no such warranties about the title.
• A special warranty deed guarantees against title problems that occurred during a seller's ownership period, but not before.
• A deed of release is often used when a mortgage is paid off and the bank transfers the entire ownership back to the person who bought the property and took out the loan. It releases the note against the property.

Benefits of a trustee deed

If you purchase a home with a trustee deed, the primary benefit is that you can likely purchase it for a bargain-basement price. The goal of the sale is to pay back the lender for some of the loan, so you will likely be able to purchase the home for less than its market value.

Another benefit of this kind of purchase is speed. The transfer happens very quickly, without a long lead-up to closing. You pay and you get the deed. If you're looking to flip homes, for example, this can help you get going quickly.

Drawbacks of a trustee deed

The major drawback with purchasing a home via a trustee deed is that there may be other outstanding loans in place against the property. These could include unpaid IRS liens, unpaid property taxes, or contractor's liens. If you buy the home with these liens in place, you're responsible for settling them. A key consideration to keep in mind is that the trustee deed may be from a second mortgage (such as a home equity loan), leaving a first mortgage still in place and unpaid on the property.

Another issue with trustee deeds is that it can be very challenging to obtain a mortgage yourself if you are purchasing the property with only a trustee deed, because there is no guarantee that the title is clear. Cash purchases are best.

Purchasing a foreclosed home with a trustee deed can be a great way to pick up valuable property for less, so long as you are fully aware of the financial risks associated with the purchase.