Legal Protections when Investing

[Juan Diaz]

Hi All,

Just thought I’d share a bit of my experience in the investing world, touching today on everyone’s favorite subject, the legal system! Since everyone loves to study the nitty gritty of the law (sarcasm intended), I thought I’d share a few of my experiences dealing with a few legal apparatuses that protected me and/or my investor when trouble arose.

First of all, what I’m describing are legal protections that protect my relationship with the investor. A well-designed legal instrument will protect the interest of both parties. I work with investors—they provide the money, I provide the sweat, and we split the profit or loss 50/50. In my particular situation, usually either myself or my investor is going to want some sort of legal protection.

The best way that we have found to protect ourselves legally is to use a document called a “Deed of Trust”. In California, this is the main document used to secure interest in a property. In other states there are similar documents that serve the same purpose.

What is the deed of trust? The deed of trust is a very simple document. It spells out the legal description of the property, and then the beneficiary, trustor, and trustee. The trustor would be the person whose name is on title, the trustee/beneficiary is you or the investor, whoever it is that is protecting the interest in the property.It also has legal language spelling out what the rights are with the deed of trust, but these will stay constant from document to document.

The last thing that a deed of trust does is to refer to a note, which details the specific terms of your agreement. This note is the meat and potatoes of the legal protection between yourself and your investor. This note will allow you to detail anything and everything pertaining to the property. How are you dividing the profits? What are the responsibilities of each party? How does either party exit the agreement? A well drawn-up note is absolutely essentially to legally protecting your interest in a property.

With these two pieces of information, the deed of trust and the note, we’re able to operate confidently, knowing that our investor’s interests and our own interests are both strongly protected with a binding agreement that spells out the rights of both parties. It’s been useful in the rare cases where I’ve had a fundamental disagreement on the disposition of the property with the investor. Because our note provided clear terms for disengaging ourselves from the situation, we were able to calmly come to a mutual beneficial situation, even if we were not able to continue the investing relationship on that particular property.

So how does one go about drawing up a note and deed of trust, or the equivalent documents for another state? That’s a great question, and one that you can start off with by asking a lawyer. You can get a lawyer to draw up a document that you can use for all of your transactions, modifying only the trustor/trustee/beneficiary, legal description, and investor information. It’s a few thousand dollars, but if you’re investing in dozens of properties a year, it’s well worth the time and money to clarify and protect your legal rights and the rights of your investors.