Posted by JT-IN on July 05, 2008 at 09:02:07:
Philip:
Taking over a loan is a little different (well maybe a lot diff) than buying a note/mtg. Completely different transactions, really. It appears that your question is more directed at the purchase of a note and mtg…
First off, due to securitization of mtgs and deeds of trust today, many lenders are unable to sell the mtg, so the actual practice is few and far between, in reality. However, when you find a lender willing and able to sell the paper, you will need a discount larger than 15-20% in otder to make most of these work for you… There are of course many variables… such as what is the true underlying value of the property…? I have participated in some of these where the perceived value was low, but in reality the FMV was much higher, so a purchase of a relatively high LTV % would work in that case… but those are rare.
For the most part, I would think that you would need to purchase the paper at not more than 60-65% of FMV of the property… again, many vcariables here… Whether you are talking about a property worth 30K or 300K, makes a huge swing in strategy, so hard to generalize with advice here.
The exit strategy depends a lot as well… it seems that you are referring to a specific strategy here, “buy the note and give the occupants time to recover”. These rarely work well, again, unless specific circumstances exist, and when they do work, more than 15-20% juice is required… Time is money and usually when an owner is in trouble, they don’t recover within a matter of a few months, it is often years, so a much larger spread is required for that reason. There are also legal fees associated with this type of purchase, which must be factored into any deal…
Bottom line is this approach is not a beginners sport. There are so many pitfalls with this type of investing that a novice will surely go broke due to the learning curve.
One last thing… 71 y.o. Dads are conservative for a reason… they have seen many things you haven’t and part of the reason that they have money is because they have withstood the temptation to invest in many other former opptys that may not have panned out as billed. So to miss the gold rush, or the land rush isn’t all that bad for a conservative person, as afterall what is most important for them is peace of mind with any investment or approach, and if it doesn’t feel right, then it isn’t right, no matter what the lost oppty happens to be.
JT-IN