You may know that there are 9 risks associated with trust deed investing. Today, I will be talking about the second risk, the risk of uncertain property valuation and how to mitigate it.

Just like there is inherent risk in trying to determine the value of a business and its stock before investing in it, there is also risk in determining the value of a property that you are considering lending on as a private lender. The advantage you have as a private lender who is lending money secured against a specific property--which investors in the stock market do not have--is the ability to insist on a margin of safety. Having a margin of safety is a primary way to reduce the risk of uncertain property valuation. How does it work?

Let's take a look at a particular property as an example. If you were looking to lend money on a property, you would definitely want to have a third independent party, who is not the borrower or a close associate of the borrower, give you a professional appraisal or valuation of the property.

While you can expect to have some variation in the value, there are some properties that are extremely difficult to value and may have imprecise appraisals. This could be caused by a lack of data of similar properties that have sold recently in that same area. It could also be that the property is relatively unique and it is hard to find any comparable properties to it. Recent changes in the market that are not currently reflected in the sales data could also lead to a less than accurate appraisal since the appraiser, lacking a crystal ball, cannot know how large the impact of these changes will be at the time of the appraisal. Whatever the reason, this information is usually disclosed in the official appraisal of the property by the third party appraiser. Taking the time to look over and understand the appraisal for the property that you are lending money on is an extremely prudent course of action.

While many properties will have accurate, well documented values, even the ones with some uncertainty can still be good investments if you only lend at a conservative ratio to the value. What is that ratio? It can vary from market to market, however I personally feel that a good rule of thumb is to keep your loan at no greater than 75% of the value of the property. This gives you a full 25% equity buffer to protect you from inaccuracies in valuing the property. This equity cushion is your margin of safety.

Provided you insist on an appraisal and keep your loan at or below 75% of this appraised value, investing in trust deeds can be a great alternative investment where you get a nice fixed rate of return secured by an asset that is worth more than the amount you are lending.

James Orr is a professional real estate investor that works with buyers, sellers and private lenders. You can learn how to get a higher return on your money with trust deed investing on his blog or calling him directly at (970) 225-6989. Article Source: http://EzineArticles.com/?expert=James_Orr