The Seattle times give some advice on Trust Deed Investing in their weekly investment column. From the article:

"Question: A family friend who is in the mortgage business told me about something called a "trust deed." It pays really great interest, like 12%, but I can't tell if it's a stupid investment or not. Before I fall for something, I wanted your opinion. — Peter in Modesto, Calif.

Answer: Trust-deed sales effectively make you — or you and a group of others — the banker in someone else's property deal. The trust deed itself is the document that a land owner provides as security for financing; effectively, you are getting a promissory note, where your loan is secured by the property.

Payouts on trust deed deals frequently run in the 10% to 13% range.

For an average investor, trust deeds have a lot of risk. That said, they have yet to be featured as a "stupid investment," because I haven't seen a lot of trust-deed failures, despite sales-practice concerns that prompted the California Department of Real Estate to issue a "What You Should Know" brochure in 2007.

What is clear is that trust-deed investing is tricky stuff, even before factoring in the current credit crunch and real estate meltdown. Put your money into the wrong deal and you're looking at the kind of failure that has driven some banks to the brink, having an ownership stake in a property that is losing value and that you have to take back from the borrower through foreclosure.

You don't have a bank's deep pockets or ability to withstand losses.

What's clear about trust-deed investing is that there's a lot to know in order to get comfortable with it, starting with the experience and integrity of the loan broker but extending to what happens if the deal goes sour. Because of the dollars involved, this typically isn't something the average investor considers, but if you're starting at the point of "something called a trust deed," it's clear you don't know enough to make it a smart investment for you."