Deeds of trust secure notes on property

Most residential properties are sold free and clear of liens.

Institutional lenders, such as banks, require lender's title insurance to ensure that no one else has a claim on the property.

Homebuyers are advised to get title insurance coverage, but it is optional, said S. Page Allen, chairwoman-elect of the real estate section of the Richmond Bar Association.

Typically, the bank or lender would hold the first mortgage. A second mortgage and/or a line of credit could be attached as well.

In a real estate investment situation, where the lender is an investor and not an institution, title insurance may not come into play. One property could have a myriad of liens -- if there was no title policy.

Plus, any number of notes secured by deeds of trust can be issued on a property.

The note is the obligation agreement to lend the money and pay it back. The deed of trust is recorded at the courthouse and secures the note.

"You could conceivably pool money and have more than one note holder on one deed of trust," said Allen of S. Page Allen & Associates in Chesterfield County.

In Virginia, the order in which deeds of trusts are recorded at the courthouse determines whether they are first, second or subsequent deeds, Allen said.

First deed of trust holders are first in line to get their money back from a property sale, while the second deed of trust holders would be next.

Unless title searches are conducted, investors would not necessarily know which deed positions they hold.

All mortgage holders would need to agree to release their liens to allow for a sale.

If a house is worth less than what is owed on it, investors might agree to a foreclosure, but the first lien holders would get their money first and subsequent deed of trust holders could get wiped out, Allen said.

"That is why it's important to be in first position, because you get your money first," she said.

Real estate investments can be fruitful financially if the owner does what is supposed to be done, Allen said.

A property, for instance, could be bought for $50,000, but a bank may agree to lend $200,000 -- the purchase price plus renovation costs -- if the renovated house is worth $250,000, typically 80 percent loan-to-value.

With an institutional or bank loan on a renovation project, money would be doled out as work progresses.

"If the lender is willing to lend more money than the property is worth, it is not illegal," she said. "What would be illegal is misrepresenting the value of the property."

Contact Carol Hazard at