Private-party investors Play a unique and often misunderstood role in the real estate finance landscape. 

Unlike institutional lenders—banks, credit unions, and insurance companies—private investors enter the marketplace with personal capital, targeted objectives, and a different risk-reward calculus.  These investors willingly purchase and own promissory notes secured by trust deeds or mortgages, creating an asset class that blends real estate with the characteristics of personal property and financial securities.

Yet many new investors are surprised to learn that the simple Act of owning a note and trust deed is not just a real estate transaction—it is also the purchase of a security under federal Law.  Understanding why is essential for anyone involved in trust deed investing.

What Private-Party Investors Actually Own

When private individuals invest in real estate loans, they are “acquiring paper”—a promissory note and its related security instrument (a deed of trust or mortgage).  These documents define the Borrower’s repayment obligations and the lender’s contractual rights.

Promissory Note: The Heart of the Investment

A promissory note is a written promise by the Borrower to repay a specified sum of money under agreed terms.
It outlines:

• Principal amount
• Interest rate
• Payment schedule
• Maturity date
• Remedies in case of default

The note is the investor’s evidence of indebtedness—their legal claim to repayment.

Trust Deed or Mortgage: The Security Instrument

The deed of trust or mortgage ties the note to a real property asset.  It gives the investor a security interest in the property, allowing foreclosure if the Borrower defaults.

Despite being secured by real estate, the investor does not own the real estate—they own the documentation that grants them certain rights relative to it.

This distinction leads to an essential legal classification.

Promissory Notes and Trust Deeds Are Personal Property

Many investors assume that because their investment is “secured by real estate,” they are dealing in real property.  Not so.

Under general property Law, a promissory note and its related security instrument are personal property—intangible financial assets, not hard real estate.

Why does this matter?

• Personal property can be bought, sold, gifted, or assigned much more easily than real property.
• Transfers do not require deeds, escrow, or title insurance (though they often benefit from documentation and professional oversight).
• The rights and remedies fall under contract Law and commercial Law, not property Law alone.

The value of the note depends on the Borrower’s ability to repay—not on the investor’s ownership of land.

This leads directly to the security-law implications.

Why Private-Party Real Estate Loans Are Considered Securities

Under the Securities Act of 1933, a wide range of financial instruments qualify as securities—including those that represent evidence of indebtedness.  Promissory notes fall squarely within this category unless an exemption applies.

How the Law Defines a Security

The Act provides a broad definition.  Security includes:

• “Any note.”
• “Evidence of indebtedness.”
• “Instrument commonly known as a security.”

The spirit of the Law is investor protection.  If one person takes money from another in expectation of repayment or profit, the federal government wants disclosure, oversight, and transparency.

Two Key Legal Concepts Make Notes Securities

1.  Notes Are Evidence of Indebtedness

By their nature, promissory notes document a Borrower’s debt obligation—placing them firmly in the “security” category unless specifically exempted.

2.  Security Instruments Serve as Collateral to Guarantee Performance

A trust deed or mortgage is considered a security instrument because it:

• Pledges property as collateral
• Guarantees the performance of the Borrower’s obligation
• Confirms the investor’s security interest in the asset

For precise statutory language, investors can review Section 2(a)(1) of the Securities Act of 1933, which is publicly available.

Understanding the Dual Nature of Trust Deed Investing

Trust deed investing sits at the intersection of:

• Real estate (as collateral)
• Finance (as a loan)
• Securities Law (as evidence of indebtedness)

This hybrid structure brings advantages—but also responsibilities.

Why the Security Classification Matters

The moment a private investor buys a note, several compliance considerations arise:

• Disclosure requirements
• Registration or exemption of the transaction
• Rules governing selling, advertising, or fractionalizing notes
• Obligations for brokers and intermediaries
• Anti-fraud provisions

This framework exists to protect both sides of the transaction.

The Role of the Private Investor: Active or Passive?

Private-party lenders range from highly experienced professionals to individuals simply seeking yield.  Regardless of sophistication, investors must understand the nature of the investment they hold.

Active Investors

These investors:

• Source deals directly
• Evaluate property and Borrower risk
• Service or oversee servicing of the loan
• Manage extensions, defaults, and foreclosure decisions

They behave much like a private bank and take responsibility for the entire loan process.

Passive Investors

Many investors prefer a more hands-off approach and rely on:

• Licensed brokers
• Loan originators
• Fund managers
• Servicing companies

In these arrangements, the security classification becomes even more relevant because laws govern how professionals can manage, pool, or market loans to investors.

Risks and Rewards of Trust Deed Investments

Trust deed investing can provide:

• Attractive yield
• Predictable income
• Hard-asset collateral
• Short- to medium-term investment horizons

Yet risks include:

• Borrower default
• Property value fluctuations
• Fraud or documentation errors
• Legal compliance failures
• Illiquidity in certain market conditions

Understanding the legal and financial framework helps investors reduce exposure while enhancing returns.

Why Professional Guidance Is Essential

Because purchasing a note is both a property-secured transaction and the acquisition of a security, investors benefit from professional oversight, including:

• Licensed mortgage loan brokers
• Attorneys familiar with securities exemptions
• Title and escrow professionals
• Loan servicers
• Underwriters and document preparation specialists

A knowledgeable team can help ensure:

• Proper due diligence
• Accurate valuation
• Compliance with securities and lending laws
• Protection of investor rights

Conclusion: A Sophisticated Asset Class That Rewards Education

Private-party investors who enter the world of trust deed or mortgage lending are not merely “lenders”—they become owners of financial instruments recognized as securities.  This distinction brings both benefits and responsibilities.  The more clearly investors understand the nature of their asset, the structure of the Law, and the risks of the marketplace, the more effectively they can deploy capital with confidence.

Trust deed investing is not simply about lending money secured by property.  It is about owning a financial asset that requires thoughtful evaluation, legal awareness, and strategic management.  Those who approach it with professionalism and due diligence can find it a compelling and rewarding component of a diversified investment strategy.