A deed of trust is a legal document in which a borrower in a business transaction conveys the title of a property to a trustee as security for a loan, with the trustee holding the property's title until the loan is repaid.
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Last Updated: February 27, 2026
Many people who go through the process of purchasing real estate encounter the term “Deed of Trust” at some point. But what exactly is a deed of trust, and why are these deeds important? Why might a business owner encounter a deed of trust while running their company?
This guide walks through all the essentials of what a deed of trust is in the business world, including what these deeds are, their benefits and drawbacks, and more.
A deed of trust is a particular type of legal document frequently used in financed real estate transactions.
Deeds of trust involve three parties:
The deed of trust essentially acts as an agreement between these parties stating that in exchange for financing provided to the borrower by the lender, the borrower agrees to provide the lender one or more promissory notes. These promissory notes are essentially promises to pay back the borrowed money subject to the terms of the loan.
Throughout the duration of the loan, the parties agree that a third party, the trustee, will hold legal title to the property in trust until the borrower pays off the balance of the debt to the lender.
The primary benefit of a deed of trust is that it allows borrowers, who may not otherwise be able to do so, to purchase real estate. With a deed of trust, a person can still hold equitable title to real estate and thereby use and enjoy the benefits of property ownership while being able to finance the transaction and pay the debt back over a period of time.
Thus, if a small business owner needs to purchase real estate for their business but doesn’t have the means to do so in full, they might consider financing through a deed of trust.
There are certain disadvantages of utilizing a deed of trust to purchase real estate.
As with most loan arrangements, there will be interest charges that will ultimately increase a borrower’s out-of-pocket cost for the purchase over the life of the loan. Additionally, most deeds of trust include power-of-sale clauses. This means that if the borrower defaults on the terms of their loan, the trustee may elect to proceed with a non-judicial foreclosure on the property. Thus, if the borrower can’t afford to keep up with their payments, they risk losing ownership of the property without the need for court intervention.
A deed of trust is similar to a mortgage in that they are both instruments used to finance real estate transactions. However, whereas a deed of trust involves three parties, a mortgage only involves two: the borrower and their bank.
Thus, with a mortgage, there is no third-party trustee who holds the security interest in the title to the property. Rather, a mortgage creates a lien against the property in favor of the lender. This allows the lender to pursue foreclosure proceedings if the lender defaults on the loan.
No, not everyone will need a deed of trust to purchase real estate.
If a person can purchase certain real estate with cash, they won’t need financing or a deed of trust. Additionally, not all states require a deed of trust to finance real estate. Rather, many states continue to use the traditional mortgage process instead.
There are many deed of trust advantages, with the primary one being the ability to finance real estate transactions. Nevertheless, a deed of trust may not be advantageous for all prospective purchasers of property. Additionally, deeds of trust aren’t used in all states. If someone is considering financing with a deed of trust, it’s prudent to speak with a lender, real estate agent, or legal advisor to get customized guidance.
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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
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