Opportunities To Buy Good Paper Are Here Now

Tough economic times in the 1980′s produced a lot of paper. The paper I’m talking about is Private Mortgages, Trust Deeds, Land Contracts, etc. This type of paper is created when one entity (person or company) sells Real Estate to another entity and carries back a mortgage from the buyer payable to the seller, also known as “Seller Financed Paper”.

During tough economic times you will see much more of this type of paper created. The 1980′s was such a time. Many of the holders of this paper (the sellers) didn’t really want the paper; however, it was the only way they could sell their property. In addition, in tough times is when people’s credit gets hurt and they can’t get regular bank or Mortgage Company financing, thus another reason for Seller Financing. Therefore, an abundance of paper was created during this time.

The 1990′s saw Institutional Investors discovering this multitude of paper and becoming involved in very aggressive buying of this type of paper. Private investors were buying it as well; however, the institutions (with more money and willingness to buy at lower yields) made it more difficult for the private investors who found fewer amounts of paper that they could buy.

For example, during the 90′s and early 2000′s, my company bought and sold over 200 million dollars in paper. Then in the late 90′s and early 2000′s Congress pressured the banks and Mortgage companies into making home loans almost to anyone who could fog a mirror. The result = The Sub-Prime mess funded by Fannie-Mae and Freddie-Mac. This affected Seller Financing greatly. No longer were buyers hard to find who could qualify for a bank loan, so sellers didn’t have to finance the property for the buyers. So what happened? You all know; Foreclosures by the millions and the creation of another severe economic downturn. THANKS, CONGRESS.

So, the cycle has come full circle. There is an abundance of paper being created. Just check the “Homes For Sale” in your local newspaper, and see how many ads offer Seller Financing. Now we have, and are going to have, more and more Seller Financed paper available for investors to buy.

The prudent paper investor, who does due diligence, can buy paper to produce 10% – 14% Yields. Compare this to 2% of whatever the banks are paying.

So, I would advise that if you are an investor or have investor clients, consider getting in the paper buying business. Sure beats the crap-shoot in Wall Street.

If you are interested, review some of my earlier Posts about doing diligence and how to find good paper @ 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.

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.