Investing In Mortgages: Questions and Answers

During my approximately 40 years of investing, buying and selling Mortgages, Deeds of Trust, Land Contracts, etc., I have encountered many different and varied situations, problems and surprises. I have also discovered that when you get one of those surprises, it is almost never good. So, what we need to do is protect ourselves from those surprises as much as we can. I am going to list some questions and answers which, if adhered to, will eliminate some of those unpleasant surprises. To make it a little easier, we will refer to Mortgages, Trust Deeds, Land Contract, Contracts For Sale, etc., as “Mortgages”.

1. Q: What determines if a good investment in a Mortgage?
A: A good investment is when you get your invested capital back plus all the Interest or Yield due on the investment.
The following Q’s & A’s will help you to be sure you have a good investment.

2. Q: Is investing in Mortgages a “Safe” investment?
A: There is no such thing as a 100% safe investment. There is always some risk involved. That’s why we have interest. The return of Interest or Yield should be commensurate with the risk, i.e. more risk – more interest. However, if an investor does his due diligence which includes having ample Equity in the property, which secures the mortgage, it is my opinion that this would be a very “safe” investment. If the Mortgage should go into default, the property (upon sale) would return the principal, plus maybe more, to the investor.

3. Q: What are some of the risks, and what can an investor do to minimize the risks?
A: As state previously, any investment entails some risks. However, these risks can be greatly reduced if the investor does his/her due diligence. Some of the things the investor can do include:
(1) Verify the Real Market value of the property that secures the Mortgage. This can be accomplished by the investor obtaining an independent appraisal of the property. The investor or someone he/she trusts should select the appraiser. I recommend that you do not use an appraiser recommended or provided by the borrower.

(2) Be sure you use a professional Escrow Company, Title Company, or in some cases an Attorney to prepare the documents and close the transaction.

(3) Be sure you get Title Insurance. This is referred to as Mortgagee’s Title Insurance which insures the Mortgage you are buying as opposed to Owner’s Title Insurance which insures the property. BE SURE you, as the investor, get Mortgagee’s Title Insurance.

(4) If it is an improved property which secures the Mortgage, be sure you get a Fire (Casualty) Insurance policy insuring the property, naming you as additional insured. If it happens to be land, you won’t need Fire Insurance.

4. Q: How do I protect myself to ensure that I will get my investment back if the borrower doesn’t pay?
A: You have to be sure that there is enough value in the property over and above the amount of the loan (this is called Equity) so that if you have to foreclose and sell the property, you get your investment back plus costs.

There is a saying that the 3 most important things to determine the value of a property is Location, Location, Location. Well, when you are investing in a Mortgage, the 3 most important things are Equity, Equity, and Equity!

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.

How To Find Good Mortgages To Invest In - Part II

In Part I we discussed some of the ways to find “Mortgages”, but we didn’t get to the “Good” part. Once the word gets around, AND IT WILL, that you have money to invest in mortgages, you will have several to choose from. “WORD OF WARNING”: Don’t get too eager just because these are the first ones and you are excited to buy a mortgage. You MUST do your Due Diligence or your career as a ‘Mortgage Investor’ will quickly change to ‘Owner Of Real Estate You Don’t Want’.

Just like other investment opportunities, be it Stock Market, Commodities, etc, there are good and bad investments in mortgages. However, there is one GREAT difference. If you do your diligence, you will be able to know you made a good investment and not have to depend on speculation. That’s one of the main reasons I like mortgage investing as opposed to many other investments. “YOU ARE IN CONTROL OF YOUR MONEY”.

OK, lets talk about Due Diligence and other factors when analyzing a mortgage. The note broker calls and tells you he/she has a mortgage for sale; or, maybe you located a private party through the newspaper who has a mortgage for sale. NO DIFFERENCE IN DUE DILIGENCE. My point is: No matter where or how you find the note, you still use the same safety precautions.

If I could pick out one single area that has caused investors the most problems, it would be greed. Trying to get the highest dollar return and not checking out either the property securing the mortgage and/or the party making the payments on the mortgage. This includes pressure such as, “You have to act fast or this deal will be going to somebody else.” If this situation arises, my advice is to say, “Well that’s too bad, but I’ll have to let it go.”

Mortgages available for sale are kinda like buses – “If you don’t get this one, there will be another one along in a little while.”

A good place to start is to check out the broker or the party that brings you the opportunity, unless of course, it is a mortgage for sale you located yourself.

The next party I would check out (as much as is practical), is the party selling the note.
Is this a “Mom & Pop” type deal wherein a private party has sold probably the only Real Estate they will probably ever sell and carried back a mortgage?
Or, Is the seller a “Flipper” who buys mortgages and resells them to investors?
Or, Another kind of “Flipper” who buys a property and does nothing to it and flips it to another with a marked-up price with nothing down?
Or, A rehaber – a party that buys property in need of repair, fixes it up and resells it to another party?

The point is – There are all kinds of people who sell property and finance it for the buyer. Also, there are many buyers who want a home and don’t really care about price or interest rate. They are more concerned with; how much is the down payment, and how much are the monthly payments.

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.

How To Find Good Mortgages To Invest In

No Question, buying and holding (reselling) private Real Estate Mortgages can be a very lucrative investment or business. By “private” we mean mortgages, (Trust Deeds, Land Contracts, Contracts For Deed, etc.) that wherein one party, the Seller (not a Bank or other Institutional Lender) has sold a Real Estate property to another party and has taken back a mortgage from the second party or the buyer.

Now there are other types of “Paper” or Notes that fit the above description that may be secured by collateral other than Real Estate. Mobile homes, business fixtures & equipment, inventory, cars, boats, phone, etc. We are not going to discuss these here, however, we may do so at a later time because investing in these types of notes can also be very profitable, sometimes more so than Real Estate Notes because of the greater risk. When the risk is greater, the possible profits are also greater as are the possible losses.

So, back to the question; How do we find “Good” Mortgages to invest in? There are a number of ways to do this. If you get active in buying private Mortgages or lending direct, the word will quickly get around and you will have more deals to look at than you can probably handle. Let’s discuss some of the ways to start finding those Mortgages.

* Check ads in the classified section of the newspaper – Look in “Money Wanted”, “Mortgages
For Sale”, or “Investor Needed”.
* Run your own ad: “Mortgage Buyer”, or “Money To Lend On Real Estate”.
* Develop a relationship with a Real Estate Broker that has access to Multiple Listing Service
“MLS”. The Broker can access MLS and find out sales that were made wherein a seller
financed the property. Contact the seller to see if he wants to sell the Mortgage.

The best bet, in my opinion, is to contact a “Note Broker”. This is a person who specializes in finding Mortgages for sale. The Note Broker finds a buyer for the Mortgages and charges the mortgage owner a commission. Or, the Broker may buy the Mortgage himself to resell it to an Investor. You can find these Brokers in several ways, such as:

a. Check the Yellow Pages for Mortgages, or Note Buyers.
b. Check ads in the newspaper which may read: “We Buy Mortgages”, “Mortgages For Sale”,
“Top Dollar For Your Note”, etc.
c. Ask among Real Estate Brokers if they know of any other Brokers who buy Notes.

If you can’t locate a good source, check with the following reference:
Bill Mencarow
The Paper Source
317 S. Sidney Baker, PMB 304
Kerrville, TX 78028
www.PaperSourceOnline.com
email – info@papersourceonline.com
Phone: 830-895-5025

Bill publishes a monthly Newsletter called “The Paper Source”, which is a Newsletter about the Note Business. Bill has a registry of Brokers all over the country. He could probably refer you to someone. You might even want to subscribe to the Newsletter to learn more about the business. If you contact Bill (or Allison, his wife & partner) tell him I referred you!
We have just scratched the surface here. We will continue next time on “How To Find Good Mortgages To Invest In - Part II”. I would appreciate your comments.


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.

Investing In Mortgages

As we discussed previously, debt instruments can come in different flavors – Mortgages, Trust Deeds, Contracts, etc. In order to simplify somewhat, henceforth, we will just lump these together and call them “PAPER”.

Further on when we talk about what you are buying when investing in paper, we will call the actual document that spells out the details of payment the “NOTE”. At any point in these posts is you do not understand what we are talking about, please let me know and I will try to clarify. PLEASE do this because it can (and will) sometimes be very confusing. It is NOT a simple subject HOWEVER it can be and is a very lucrative investment program.

Investing in paper can be, and should be, very rewarding if the investor is prudent and knowledgeable. In goal, these posts are to make you more knowledgeable and point out some things to help you be prudent.

I’m sure you’ve heard that the three most important things about Real Estate are Location, Location, and Location. The three most important things about investing in paper are Equity, Equity, and Equity. You want to be sure that if the worst happens and you have to foreclose on the security property that you have enough equity in the property to get your investment back. HOW DO YOU DO THAT?

You do it PRIOR to buying the note. As we discussed in a previous post, you need to establish the true market value of the property. This can be done by an independent appraisal (just like the bank does it) or by your own experience or by a trusted person that you know who is very knowledgeable about the local Real Estate market.

If you intend to keep the note (not resell it at a profit, which we will discuss later) your due diligence is not over. Some things you need to pay close attention to are:
Is the payor keeping insurance on the property? (If improved property; house, etc.) Be sure you are named as additionally insured on the policy and you get proof from the insurance company each year that the insurance is renewed.
Is the payor keeping the Real Estate taxes paid on the property? Demand that the payor send you a copy of the taxes paid receipt. You can always check with the Tax Collector’s office to check this out.
If improved property, drive by (or have someone drive by) the property occasionally to make sure it is being reasonably kept up.
If possible, obtain a credit report on the payor on the note. Also, check the payor’s employment situation. With this information plus the credit report you should be able to determine if the payors seem capable of making future payments on the note.
Check the pay history on the note with the person selling you the note. You want to know if the payor has consistently been on time with his payments. Verify this with actual documents such as canceled checks, deposit slips or service records if the note is serviced by another party. Be cautious if the pay history is handwritten by the owner on tablet.

Actually, even if you intend to sell the note, your buyer will want to know all this information as well. Next time we will talk about Interest, Return, and Yield. Is Interest the same as Yield?

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.

More On Investing In Mortgages, Trust Deeds, or Contracts

How much money do I need as an investor to buy mortgages? This, of course, can vary; and you can probably find investments available as low as $15,000 to $20,000; however, more likely there are plenty available under $50,000.

How do we find opportunities to invest in mortgages? You can advertise in your local newspaper or look up Note Brokers, of which there are plenty to choose from. I suggest that you interview Note Brokers until you find one you are comfortable with and have him (or her) find mortgages for you to invest in.

The Note Broker should know how to protect your interest and ensure that all the “due diligence” (previously discussed) is performed. Question him prior to buying any notes through him, and then check his work.

Let’s talk a little bit about Risk -vs- Yield. Further, in looking at Risk -vs- Yield, how is that affected by the type of mortgage investing one does – Direct Lending or Buying existing loans?
Direct Lending - is usually safer than buying existing notes because the lender has more control, such as requiring credit information on the borrower and requiring a thorough appraisal of the property. In addition, there are numerous licensed Mortgage Brokers who specialize in Private Money Lending. These people can help the lender locate people who want to borrow money.

Mortgage Brokers can be of great assistance in the due diligence phase, however, they do charge a fee which is usually called points. One percent of the loan amount would be one point. Some Mortgage Brokers tend to get a little greedy and may charge “excessive” points. The points charged are negotiable and the borrower pays the points. Normally the borrower pays ALL costs to make the loan: points, escrow fees, Title insurance, appraisals, document preparation fees, etc.

The advantages over other investments (Stocks for example) is that the investor has something TANGIBLE as security. One very important thing that a Mortgage Investor MUST keep foremost in mind is this: anytime the investor makes a loan or buys an existing loan, there is a possibility that the investor may end up OWNING the property which is the security for the loan.

Here is the CRUCIAL QUESTION: If that happens, can the investor recover the money he has invested? If the answer is “no” – then the investor should NOT MAKE THE INVESTMENT. This means that the investor needs to know how the reasonable market for Real Estate in the area where the security property is located. Obviously, if the investor has to foreclose on the security property, he will then have to re-sell the property to recover his investment. There might be repairs to be made or other improvements done to make the property marketable.

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.

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.

Paper Magic

Next To Cash (and sometimes BETTER than cash), paper (Mortgages, Notes, Deeds of Trust, Land Contracts, etc.) is the most flexible negotiation instrument in the buying and selling of Real Estate. In our last discussion I stated that the creation of paper (wherein a seller finances the property purchase for the buyer by taking back a mortgage) seemed to benefit the buyer more than the seller, but this type of transaction can greatly benefit the seller also.

Example: Seller owns a property that just can’t seem to get sold. Maybe just because of the slow market or because it’s unfinanceable by an institutional lender because it’s land, mobile home & land, and any number of other reasons.

There is a very viable market for Seller-Finance paper. There are many investors, to include banks and other entities (pension funds, private investors, etc.) who buy paper on a regular basis. There are a multitude of brokers who are eager to help an owner sell this paper. In addition there are many buyers & brokers who advertise on the Internet.

In order to have “Salable” paper, the seller of the property shouldn’t accept just any buyer. I would suggest requiring an application outlining employment, etc. Also, I recommend a fair amount down payment – 5% to 10% (the more, the better) – Then, I would require a credit report on the potential buyer. Things I look for is their past pay history on home loan payments or rent and car loan payments. I have found that people who have a good history of paying their housing cost & car payments will probably make the payments on a mortgage secured by their new purchase.

Paper also makes a good investment to put in ones 401K or other Retirement Program. In fact, you can have your 401K purchase paper. We will discuss this more of this later.
The seller can also use the paper to purchase other Real Estate with. I have purchased a lot of Real Estate with paper; buying the real estate at face value of the paper, which I purchased at substantial discount. This builds an immediate profit in the property being acquired.
More on Paper Magic to come - We haven’t even scratched the surface yet!

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.

Private Mortgages

PRIVATE MORTGAGES: These are debt instruments that are created when a seller sells a real estate property to a buyer and finances the property for the buyer. Example: Mr. Jones sells a house to Mr. & Mrs. Smith for $100,000. Mr. Jones agrees to accept $10,000 cash as a down payment and to carry back a note or mortgage for $90,000 payable at $789.81 per month for thirty years. The debt instruments may be in many different forms and have different names depending primarily in what part of the country the transaction takes place. Some of the various names include: Mortgage, Note & Deed of Trust, Land Contract, Agreement of Sale, Contract for Deed, etc. They all have one thing in common. That is, they are created when a seller sells a real estate property and finances it for the buyer. This is commonly called Seller Financing.

Now I know that this very basic information for many of you reading this; however, for others it is not. We are going to discuss here and in the future, advantages to both seller and buyer in the use of Seller Financing.

First off, there are numerous reasons why sellers would be willing to sell their property using Seller Financing, such as:
Property has been on the market a long time with no buyers.
Property may be un-financible by a lending institution such as a bank. Why? – It could be:
Land – hard to get banks to loan on land
Mobile Homes on land
Property in improper zoning area.
Poor condition of property etc., etc.
The seller may not want to receive all cash for tax reasons etc. etc.

Secondly, the buyers may have any number of reasons why they would prefer Seller Financing, such as:
Buyers may have some glitches on their credit and can’t get bank financing.
Buyers may be self-employed and have trouble getting financing.
Buyers may desire for many other reasons not to use bank financing.
I would say, all in all, the advantages here may appear to be in favor of the buyer; however, as we progress in our discussion, I think you will see many advantages and benefits for the seller as well.

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.