Residual Income Through Real Estate - Buying Discounted Mortgages

Buying discounted notes can generate residual income just like methods used by financial markets on Wall Street, only on a smaller scale. Have you ever heard of Mortgage Securities?

They follow the strategy I am about to show you but on a billion dollar a year scale. If it can work for them, surely it can work for you!

Certain pieces of information become public knowledge when a home is sold. These items include:

Price
Taxes
Liens
Buyer's Name
Seller's Name
Amount of Mortgage
Names of Lenders

All of this information can be found at your County Courthouse or the Clerk's Office.

Suppose that a house seller is asking $100,000 as the purchase price. A couple (we'll call them Mr. & Mrs. Goodcredit) comes by to look at the house. Both of the Goodcredits earn respectable incomes, and have excellent credit and work histories. But Goodcredits are shy of the last $5,000 for the down payment.

With mortgage rates at 7.5%, they ask the seller if she would be willing to take an interest only mortgage for eight years. An interest only mortgage is on where only the interest is paid during the term of the loan and the full balance is paid at the maturity date. In this case, it means the Goodcredits would pay $500 per year for the next eight years, then in the 8th year, pay off the full $5,000. Both the primary mortgage and this second mortgage will be recorded at the local courthouse or county clerk's office. In other words, the financing becomes a matter of public record.

Knowing this, how do you make residual income? Here's what you do. Go down to wherever real estate mortgages are recorded and look for properties that have 2 mortgages - the primary and the secondary. The primary will usual be a financial institution and the secondary is often an individual. This research is mind numbing, but remember, residuality is not free!! Incomes do take work! So, you need to find about twenty of these situations, and write down who the second mortgage holders are. Next, call them. And here's what you'll say:

Hello, Ms. Smith, my name is Jim Farnham. I'm a real estate investor, and I understand that you hold a mortgage for $5,000 on the property located at 123 Anywhere St., here in Anytown. Is that true?

She'll reply, "Well, I don't know! Who are you anyway, and how do you know about any of that?"

Well, Ms. Smith, as I say, I'm a real estate investor, and I'm just wondering if you'd be willing to sell that mortgage. You see, I pay cash for these kinds of mortgages, and I wanted to offer to buy that mortgage from you for cash? Would that be of interest to you?

Well, maybe, that depends on what you're offering.

Well, I would be willing to buy the mortgage for at a discount. So I could offer you $3,000. (Your offer should be between 60% and 75% of the loan in order to make a profit.) How does that sound?

(Your success here relies on the possibility of one, or even both, of two conditions: 1) a lump sum of cash is currently more attractive to Ms. Smith; 2) payments over time have become more of a hassle for Ms. Smith, even if they'd in fact turn out to be more profitable.)

Why yes, I think I may be interested.

You know Mrs. Smith, what I'd like to do is meet with you at your attorney's office to show you my proposal.

(In this way, Mrs. Smith can feel rock solid that this is not a scam. Going to her own attorney will make her feel secure that you are who you say you are.)

Following is an illustration demonstrating a potential 30% return on this investment

Face Value	$ 5,000
Purchase Price	$ 3,000
Term Balance	5 years
Original Interest Rate	10%
Monthly Cash Flow	$ 41.67
Annual Return	500/3000 = 16.7%
Total interest you received	$2,500
Discount	$2,000
Total Profit	$4,500
Average Annual Return	(4,500/3,000) / 5 years = 30% Thank you very much!

Let's look at another example. Let's say you find a property valued at $80,000. The seller is retiring, owns the place free and clear (no mortgages) and wants to buy a condo in Florida for $30,000. You suggest that he invest the balance of his equity into seasoned mortgages worth $50,000 and paying 10% interest, with monthly payments of about $500 per month to supplement his Social Security. This income will NOT affect his Social Security. He agrees.

Now, locate a mortgage with a $50,000+ face value, at 10% interest with monthly payments of at least $500. Offer the mortgage holder $35,000 cash, to be paid at closing. The note is to be placed into escrow along with signed a copy of the agreement (preferably notarized).

At closing, your bank (if YOU are buying the property) or your buyer's bank (if you are selling to a third party - see "Double Escrows") puts up the money for a first mortgage of 90% of the price, or $72,000. From this amount:

You pay $35,000 for the note. The note seller goes home, happy.
You pay the seller of the property $30,000 cash and give him the $50,000 in mortgage(s). He goes home, happy.
There is $7,000 left "on the table". This belongs to you, along with $8,000 in equity in the property (the difference between the $72,000 mortgage and the $80,000 value).

If you bought and sold simultaneously at a double escrow, you would walk away with $15,000 cash - in other words, the $7,000 left on the table and the $8,000 equity you sold to your buyer (his down payment).

Part 3: Getting Rid Of Expenses And Debt

Part 5: Buying Foreclosures