Why so much excitement over real estate notes? The risks must be reviewed carefully.
This article analyzes real estate notes from the perspective of the uninitiated. Before jumping into
the risks and possible rewards, we’ll examine how real estate transactions work when creating first
mortgage notes. Second mortgage notes differentiate from first mortgage notes and involve more risk.
Eventually, the way note brokers value notes is another risk to consider very cautiously. While the
savviest real estate investors systematically invest in real estate notes, does it really makes sense
for you? By way of comparison, some companies offer different methods of handling notes.
To understand first mortgage notes, compare how banks resell notes. Likely you are aware
that financial institutions routinely sell home mortgages to other lenders. At times, individuals who
own their home free and clear become the lender by financing their equity when they sell. Frequently
these loans include a balloon payment, which is a large final payment. Balloon payments are often setup
to come due within 10 years or less because sellers want cash quickly. When a seller decides to sell
a note, you pay cash for the note and begin receiving payments from the borrower. Now that we have
briefly considered first mortgage notes, we will consider second mortgages notes.
Real estate transactions create second mortgage notes when the seller finances only a
portion of their equity. In these cases, the buyer secures other financing for the first mortgage.
Legally, the terms "first" and "second" refer to the lien position of the loan.
Indicating the priority, lien position determines which loan gets paid first in case of foreclosure or
bankruptcy. Consequently, seconds, short for second mortgage notes, are considered somewhat riskier
than first mortgages. Since they carry additional risk, banks routinely charge higher interest for
second mortgages. Imitating banks, you will expect to earn breathtaking yields of 10%, 14% or more
when you buy seconds or thirds. Whether it is sensible to purchase second or third mortgage notes
depends on the payor of the note.
The crucial factor in valuing a note continues to be the reliability of the payor.
Significantly, most notes available for purchase have an owner occupant payor. If you purchase the
note through a note broker, the broker will determine the value of the note using the payor’s credit
history. However, after you purchase the note, the payor’s situation may change. Collecting the
payments has then become your responsibility. Are you ready to be the bill collector? Are you ready
to renegotiate the note? Are you ready to foreclose and resell the house? While the reliability of
the payor looms as a large consideration, savvy real estate investors reason like banks and charge
forward into this lucrative industry.
The savviest real estate investors love purchasing real estate notes whether first,
second, or third mortgages. Essentially, this joy arises from their talent and experience at handling
the problems. When a note turns sour from nonpayment, these investors know how to collect, renegotiate,
or foreclose. Consequently, they generate enormous cash flow from very safe investments. Very high
yields of 10%, 14% or more motivate these investors. Realizing their note is secured on real estate
and insured for hazards, they also know their note will be paid in full if the occupant sells or
refinances the house. Not surprisingly, they consider second and third mortgages far better investment
vehicles than the stock market or mutual funds. These investors reason like banks do to achieve
superior returns on their capital; you can level the playing field by utilizing companies that handle
the grunt work and guarantee payments.
A growing breed of real estate companies and note brokers guarantee payments and handle all
collections. This waive of services came about in response to the needs of note buyers wishing to
bypass the hassle of debt servicing. Rather than leave you in the cold if a note turns sour, these
companies make themselves liable as the payor on the note and guarantee your payments regardless of
whether the occupant pays. Additionally, a real estate company has greater financial resources than an
individual borrower; this reduces your risk substantially. These companies create the same reliability
as banks allowing you to profit like the savviest real estate investors.
First and second mortgages notes actually are familiar to those of us who have ever owned
a home. Seeking the best returns, you will select your payor very carefully because there lays the
greatest risk. Assuredly, savvy real estate investors invest in real estate notes because they have
the know-how to handle nonpayment issues. Because there are real estate companies that guarantee
payments and handle the problems, you can reap the rewards of more lucrative, and safer real estate
notes than many other investment vehicles. Those who exclaim real estate notes are not safe are dead
wrong; they simply don’t have the know-how to protect their investment. So most important of all, you
must choose your payor wisely. Once you have chosen an established real estate company that guarantees
payments and manages borrowers, begin investing a portion of your portfolio right away.
"Think I'm a bank" you ask. Of course not. But start amassing steady, predictable profits
Think like banks do.
Copyright © Mark Walter
About the Author
Mark Walter enjoys writing articles on real estate investing. He also owns and operates an established
real estate company offering greater financial returns to buyers and sellers of houses and real estate
notes in Virginia. Visit his web site at
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