Legal Definitions - deed of trust

A deed of trust is a legal document used in some states as an alternative to a mortgage to secure a loan for real estate. It involves three parties: a borrower, a lender, and a neutral third party called a trustee.

When a borrower takes out a loan to purchase or refinance property, they sign a promissory note promising to repay the lender. To secure this promise, the borrower transfers a limited interest in the property to the trustee. The trustee holds this interest for the benefit of the lender until the loan is fully repaid. This arrangement ensures that if the borrower fails to make payments (defaults), the trustee has the authority to take action on behalf of the lender.

A key feature of most deeds of trust is a "power-of-sale" clause. This clause allows the trustee, upon the borrower's default, to sell the property through a process known as non-judicial foreclosure. This means the property can be sold to satisfy the debt without the need for a lengthy court proceeding, which can often make the foreclosure process quicker than with a traditional mortgage in some jurisdictions. Once the loan is paid off, the trustee's interest in the property is released, and full ownership reverts to the borrower.

• Example 1: Commercial Property Purchase

  Dr. Anya Sharma wants to buy an existing medical office building for her growing practice. She secures a loan from Citywide Bank to finance the purchase.

  In this scenario, Dr. Sharma is the borrower, Citywide Bank is the lender, and Apex Title Company acts as the trustee. Dr. Sharma signs a promissory note to Citywide Bank and simultaneously executes a deed of trust, transferring a security interest in the medical office building to Apex Title Company. If Dr. Sharma defaults on her loan payments, Apex Title Company, as the trustee, would have the authority to initiate a non-judicial foreclosure sale of the office building to help Citywide Bank recover its funds, without needing to go through a court first.

• Example 2: Land Development Loan

  Green Acres Development LLC obtains a substantial loan from Capital Investors Group to purchase a large parcel of undeveloped land for a future housing project.

  Here, Green Acres Development LLC is the borrower, Capital Investors Group is the lender, and Corporate Trust Services is the trustee. To secure the loan, Green Acres Development LLC executes a deed of trust, granting Corporate Trust Services a security interest in the undeveloped land. This arrangement protects Capital Investors Group. Should Green Acres Development LLC fail to meet its loan obligations, Corporate Trust Services, acting as the trustee, could exercise the power-of-sale clause in the deed of trust to sell the land and repay Capital Investors Group, bypassing a potentially lengthy judicial process.