Chapter 2

STOCKS vs TRUST DEEDS

(from the BOOK "BETTER THAN GOLD")

© 1999 BRAD EVANS

PPPSSSTTT!! So You Think It's Safer to Invest in the Stock Market?

2. A stock is backed up by conglomerate equipment and properties: factories, warehouses, ships, port facilities, headquarters buildings, mills, etc., oftentimes in foreign countries. This can be non real estate items such as goodwill, intangible assets, and even personal property as well, whereas, Trust Deeds are collateralized only by real estate within the United States and most often by homes within the investor's local area. To me, the home is the very building block of our society.

 3. A stock owner is in the third lien position (behind bondholders and preferred stockholders), whereas, a Trust Deed owner is usually in the first or second lien position. SEE PROTOCOL III

4. A stock owner's security position is shared with thousands of other people (that's why they call it "share"). A Trust Deed owner's security position is shared with no one.

5. A stock broker charges a fee to every investor, while your Trust Deed broker usually charges no fee to you. What do you think a stockbroker would advise you to invest in? Would he profit more from your decision to invest in stocks or Deeds of Trust, the one that pays him the most or the one that pays you the most? A Trust Deed broker charges no fee to his investors, thus, you will not see any stockbrokers out there peddling advice to invest in notes and Deeds of Trust, they can't afford to.

 6. A stock can only be bought and sold through brokers. A Trust Deed can be bought and sold through brokers, but it can also be bought and sold through private parties without any stock or brokerage fee.

 7. A stock either pays no dividends, or pays a dividend well below the prime interest rate. A Trust Deed (especially when bought at a discount) pays well over the prime rate. With private money and Safe Trust Deed Investing, we are not adversely affected by to the prime interest rate as, say for example, the stock market can be. Generally, when interest rates fall, I, personally, have seen stocks and bonds be affected. When interest rates climb, the interest rate that you get on your house at the bank also goes up. Private lending through private individuals is regulated only by the supply and demand of money. If there are not a lot of private investors in your home town, you can command much higher yields than if the newspaper's advertising section is loaded with them. (Brad says, "When it's good, it's good, and when things are bad Trust Deeds get even better!").

 Also, many stocks don't generate a monthly income, whereas houses and Trust Deeds do. Stocks don't pay monthly interest payments either, as do Trust Deeds....do they!

8. A stock's dividend payments to you may be legally halted at any time by a vote of the board of directors; a Trust Deeds payments to you can never be legally halted. Even if the person files for bankruptcy, your interest clock is still ticking as you continue accruing interest on your money though you may not receive your payments until the property sells. You can go to the bankruptcy court and ask to have the stay removed, this is called "getting relief from the stay". You can have the bankruptcy court allow you to take that particular property out of the bankruptcy. You may be permitted by the bankruptcy court to go ahead and hold your foreclosure sale as long as there isn't too large of an equity in the property. SEE PROTOCOL III

9. If a stock stops paying you, you have no recourse. If a Trust Deed borrower stops paying you, however, you have lots of recourse, including borrowing money against the Trust Deed, filing foreclosure or liquidating the investment by selling the note and Deed of Trust. Believe me, filing notice of default on a delinquent borrower is like a severe bee sting, usually altering the tardy borrower's attitude! If a stock stops going up, you're not in control, you're not in the drivers' seat. In Trust Deed investing, however, you are in the drivers' seat. Remember the Golden Rule: "He who has the gold, makes the rules!", and that will be you on every Trust Deed.

10. A stock never makes you principal payments, while a Trust Deed will. A Trust Deed makes principal regular principal payments when amortized and also makes a principal payment in the end (a balloon payment is a principal payment in full at the payoff due date). What stock has that? With Trust Deeds, there is always a due date for you to be paid all your money back, plus interest, whereas the stock market has no provision for you to be paid back, "interest" or "anything", ever.

 11. A stock is bought and sold in a market heavily controlled by politicians and non elected bureaucrats. Existing Deeds of Trust are bought and sold in a free enterprise market regulated only by the supply and demand of money.

I prefer to originating brand new notes and Deeds of Trust with new policies of Title and fire insurance as opposed to dabbling in existing notes and Trust Deeds. I look at a note and T.D. slightly similar to the way I might look at the purchase of a used car. Would you rather have somebody else's headache that they're trying to unload, or would you rather have a brand new car that was just created and is right off the showroom floor with a new car warranty?

 More particularly, given a choice, I always prefer specializing in new, single family construction financing and originating loans rather than being involved in existing notes and Deeds of Trust as many times, someone is trying to get rid of a problem or headache note. Or worse yet the note may not have been originated correctly in the first place

 On the other hand, if I actually do happen to find an existing note and Deed of Trust that does have a good payment record and does fit all the criteria in my Safety Checklist, then I may get involved in it as long as it meets all the other usual standard safety criteria. SEE PROTOCOL III

 12. A stock cannot be bought or sold in the early mornings, evenings, weekends and holidays; the market is closed. A Deed of Trust can be bought or sold anytime as the market never closes. I keep a board on the wall in my office and when someone wants to invest money, they will call me anytime, sometimes they will even call me at 8:00 p.m. and leave the information on my answering machine. However, recording the paper work must be done during business hours through the title company and the County recorder's office, always.

 13. A stock is liquid if the brokers and government regulators permit it. A Trust Deed is liquid (can be bought and sold easily) at any time. Also; we agree to sell any Trust Deed brokered by us for any of our investors, anytime, and charge no fee for that service.

 I suppose it is possible that if you bought stock, it could be a stock that was forged, or even a bogus stock of some type, whereas a Deed of Trust can always be purchased with an A.L.T.A. lenders policy of title insurance, which insures you against forgery, etc.

14. A stock can never be bought "below market" and sold "above market" for a profit. The regulated market price, by definition, is the price of the stock. A Trust Deed can easily be bought "below market and sold "above market" for a profit. There is no fixed, regulated market price, only supply and demand.

15. A stock's price is fixed at a given point in time. You cannot negotiate with the seller. A Deed of Trust's price is open to negotiation between you and the seller.

16. All stock sellers receive the same price at any given moment (for the same stock). All Trust Deed sellers can shop for the best possible price at that given time. And I, personally, will sell any notes brokered by me and charge you nothing.

17. A stock owner's name is secret; you can never negotiate with him or her personally. A Trust Deed owner's name and mailing address is always made a matter of public record. You can easily send a letter to negotiate with him or her.

18. A stock is almost always sold ABOVE the value of the collateral (book value). A Deed of Trust is always sold well below the value of the collateral, or at least any of your T.D.'s will always have nearly two-to-one in collateral (if you're following the rules).

19. A stock owner's rights are strictly parceled out by the federal government in the event of a default. A Trust Deed owner's rights are set by state law and are normally very broad.

20. A stock owner has no control over his investment whatsoever in case of default; he can not foreclose, nor would he want to. He would certainly not want to own, nor wish to pay for the disposal of, bankrupt factories, mills and other commercial/industrial property in far away places. A Trust Deed owner, on the other hand, is always in the drivers seat and exercises great control over his investment. In case of default, foreclosure is just one of several options he can chose.

21. A stock's value, unfortunately, is dependent upon forces over which the investor has no control: in essence, other people's actions (buying and selling on the stock market) and is thus unpredictable. A well secured Deed of Trust's value is largely predictable: it is a function of the value of the property and the knowledge and creativity of the investor. Although you would not want to be in an area like Texas, where some real estate values are shrinking! You would be better off to concentrate on an area where there is a good strong base, where property values and employment are solid. This is why I love California real estate best of all! SEE PROTOCOL III

22. Yet every day thousands of people take the advice of a stock salesman's voice over the telephone - someone they know nothing about - and buy stocks without a second thought! But if a friend suggests to them that Trust Deeds are a better investment, they say, "OH NO, TOO RISKY!!"

 I believe that the reason this happens is because of a very few people who have broken some of the most basic Trust Deed investment rules, and their blatant, sometimes stupid, simple errors that could have easily been avoided, have given notes and Deeds of Trust a bad name. Every now and then a drunk drives up the freeway going the wrong way, with no seat belt on, at 60 m.p.h., and kills someone. But that doesn't mean that we all should quit driving our cars or quit having one beer at the local pub. There are always some people who will botch up just about anything. Needless to say, Trust Deeds, if done properly, can offer high yields with plenty of collateral. I think Wall Street is a lot like a big, big, gambling casino, whereas Trust Deeds are more like a small, stable, well producing investment!

23. A stock is a speculation, A Trust Deed is an investment.

 If you ask any stock broker today to guarantee you a yield compounded annually on a stock, he cannot. If you ask a loan broker to guarantee a yield (in California a few can as long as he has a real property securities dealer's endorsement on his license) some can guarantee you a specific high yield. Based on the face amount of a note and Deed of Trust he can sometimes net you as much as a12.5% yield, or more. Our investors have averaged more than 12% over 10 years.

 If you ask your stock broker to guarantee you against losses and to give you something in writing that he will buy that stock back from you for every dime you have in it should that company fail, he will not do that. But you or your investment broker may be happy to buy back a foreclosure for your entire investment, if it is confirmed to be backed up by nearly two-to-one in real estate equity as collateral and if you've followed the 37 tips.
 
 

Here are other items to think about:

 Also, when you lend money properly on a note and Deed of Trust, you or your appraisal representative will agree to always go to the property and look at it. I just wonder how many stock market investors have ever actually physically inspected any of the assets of the corporation of the stock they bought?!!
 
 

Again: A stock is a speculation, A Trust Deed is an investment.

SEE PROTOCOL III

Note: some of the above info was taken from an article by William J. Mencarow Jr. entitled "Stocks -Vs- Mortgages", The Paper Source (a newsletter), July, 1990. To subscribe to The Paper Source: Wm. J. Mencarow, Jr., phone: 800-542-2270 and web site: www.PaperSourceOnline.com.