Buying Mortgages

Buying Mortgages

The advantage to this type of investment, is that the rate of return is rather high with minimal risk. The disadvantage, is that your money is tied up long term, and the payments to you include principal, as well as interest, requiring you to reinvest the principal part of the payments.

After Market Mortgages.

Millions of people sell their real estate, and carry back the notes, (mortgages), themselves. Commonly called owner carry sales. The notes can be either first lien notes, (mortgages), or second mortgages. The notes are recorded at the county court house and secured by a real estate lien. Tens of thousands of these notes are bought and sold every day in the United States.

Things change! When the circumstances of the note holder changes, and they need to raise money, some the people holding the notes will sell them at a discount. That means a chance for you to earn a very good return on a fairly safe investment.

First and Second mortgages.

A first lien mortgage note gives the holder of the note the right to foreclose on the property if the borrower does not make their payments. This is the preferred lien, or first-mortgage. Real estate liens are usually given position based on when they are recorded. When a property is sold, the first lien holder gets paid first, and the second lien holder next, and so on. The interest rate charged or paid for a first lien note is lower because of the extra protection offered by being first in line. First mortgage notes on single-family homes* are considered one of the best types of loans to make because of the excellent payment record of homeowners. In other words, these types of obligations have low default rates, and very good collateral from which to recover your loan balance in the event of default by the borrower.

Second mortgage notes will have a higher interest rate because, if you foreclose on the mortgage, you have to pay off the first mortgage, or assume it, depending on the situation.

Second mortgages are the second best loan to make for the same reasons.

* Single family residences include duplexes.

Where Do You Find The Notes to Buy?

Real Estate notes are recorded at your county court house. You can look through the recorded notes at the county court house, (they are public records), and mail letters to the note holders offering to buy their notes. Or, ask the county clerk if they know anyone who does searches as a business. You hire them to do the searches for you on a regular basis.

You can also find loan brokers who will find mortgages for you. They work on a commission fee basis; they are listed in the yellow pages of major cities.

Some larger cities have real estate investment clubs. The members are always looking for lenders. You can also contact Homevestors.com. Tthey have franchisees who sell notes on homes.

You should also ask your lawyer, CPA, and your banker for the names of brokers who will help you locate loans to buy. You might consider advertising in your local newspapers classified section for notes for sale.

Contacting The Note Owners.

If you are contacting the owners (note holders) yourself, send them a letter offering to buy their mortgage note for cash. If you use a note broker, they will take care of all the details. You just let the broker know the percentage of interest, (return), you want to make.

Sample letter:

Dear: Mrs. Smith

We buy owner financed mortgage notes for cash. If you have considered selling your owner carried mortgage note, we would be pleased to make you an offer. Please contact us at 1-000-000-000 or Fax us at 1-000-000-000 we will need to know the balance owed, payment amount, interest rate, and the number of months remaining. If you fax us a copy of the note, it will speed up the process.

We look forward to hearing from you.

Sincerely yours

How Much To offer?

The math needed to calculate your return is more involved than I wish to get into here. The following web site has the books you will need to review. We are not affiliated with this company and only suggest them because they have a broad offering at reasonable prices. http://www.notetools.com/books.html

For example: If you purchased a $30,000 note, carrying an 8% interest rate, with a 30 year amortization, and a monthly principal and interest payment of $220.13. The total received over the 30 years is $79,246.00.
If you offer to buy the note at a 15% discount you would pay the note holder $25,500.00. You would still collect the full $79,246.00 over the thirty-year period. Your return would be equivalent to a 10% interest rate, because of the discounted price that you paid for the note.

This is a simplified explanation but serves to illustrate the difference. By buying the discounted $30,000 note instead of loaning the $25,500.00 directly at 8%, you have added $11,910.00 in interest plus $4,500.00 in extra principal payback. That is a 25% improvement on your invested dollars.

Administration of the notes.

I recommend that you buy notes near your home, within two hundred miles. In the event of foreclosure, your attorney will need to handle the details of foreclosing on the homeowners. You will find it easer to deal with these issues locally. If you do not wish to handle collecting, and administration of the notes yourself, note brokers can provide the services for you for a monthly fee.

The Risk.

If the homeowner does not make the payments, you will need to hire an attorney to evict the homeowner and then put the property up for sale. I have never had to do this so I am not sure of the cost. I do think that the percentage of foreclosure is so small that the risk is minimal. Just remember, that the more equity the homeowner has in the property, the less likely it will be that you will need to foreclose. If you are selective as to which loans you buy, you can keep the chances of foreclosure down to under 1%.

National foreclosure rates first quarter 2004

Conventional - .03 to 1%
VA - 1.5%
FHA/ARM - 2.3%
FHA - 2.8%

The foreclosure rates are highest in states with less job opportunity and high home prices. FHA loans have higher foreclosure rates due to young first time buyers using these loans with little to no down payment. Loans four or more years old had the least % of foreclosure.