Investing in Mortgages, Trust Deeds, or Contracts

It is not difficult. It’s just you loaning your money to another party. The loan is secured by a Mortgage, Trust Deed or Contract, on Real Estate. There are different ways you can invest in these loans. You can make the loan yourself to another party or you can buy an existing loan. There are several different names for these security instruments, and they are structured differently as well. Let’s briefly examine some of them. Mortgages and Trust Deeds are the documents securing the loan on the Real Estate. These documents are recorded showing the evidence of debt. There is one significant difference between the two. With the Trust Deed there is a separate note which is not recorded. With Mortgages and Trust Deeds, the borrower owns and has a deed to the Real Estate.

There are other debt instruments which have different names (depending on what part of the country you are in). They may be called Contracts For Deed, Agreement For Sale, Land Contract, or perhaps other names I am not familiar with.

The significant difference between these instruments and Mortgage and Trust Deeds is that the borrower DOES NOT have a deed to the Real Estate until the loan is paid off. The lender holds the title to the property and when the loan is paid, the lender deeds the property to the borrower. Sometimes these instruments are recorded but most often probably not.

In our subsequent discussions, to keep it simple, let’s just refer to all these debt instruments as mortgages. Investing in mortgages can be very lucrative with yields (return on your investment) that can range anywhere from 10% to 18% (more or less). Obviously the greater yields will normally go along with greater risk. However, if the investor is prudent and does proper “due diligence”, I can’t think of any investment today which offers a better and more predictable return.

Now, let’s talk about that “due diligence”. With investing in mortgages as with any investment, there are some risks. However, these risks can be minimized if the investor takes prudent precautionary measures. So, lets discuss the preliminary steps to take to substantially reduce the risk.
1. Be sure you get Title Insurance -normally paid by the borrower if you are making a direct loan or by the mortgage seller if you are buying a loan; however, this is negotiable.
2. Have an independent Escrow company, Title company or an attorney prepare the correct documents to ensure that the necessary documents are recorded in your name.
3. It is a good idea to have the property securing the loan appraised unless you as the investor are knowledgeable enough to know that you have adequate security and equity above the loan.
4. If it is an improved property (has buildings on it – not just land) insist on Fire insurance on the property.

Look for the continuation of this article in next week’s Paper Chase section of Jack’s blog www.realestatejack.net

These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.