Posted by Shambhu Nath on September 06, 2003 at 16:23:32:
They basically make money by yield spread premium. Note buyer may buy a note say at 10% yield and then sell it to someone at 9 % yield. The difference results in note present value increase from the one they paid.
For example, an annual annuity of $ 100 at 10% will cost $ 1000. at 9 % the cash flow of $ 100 will cost $ 1111.11. The difference of $ 111.11 is the profit if you can buy at 10% and sell at 9%. The example is for simplicity reasons but the math works same way for complex cash flows. You may find more information in the cash flow section of this site.
Posted by JT-IN on September 07, 2003 at 12:05:00:
K.M.:
Purchasing a Note & Mtg of properties that are in foreclosure can be a lucrative method of investing. I usually purcahse when the property is either in foreclosure or the owner has filed BK, and the Lender is willing to cut their losses.
On purchases that I make, they are typically on properties that I plan to ultimately bid on, or take ownership to at a subsequent sheriff sale. The purchase of a mtg at a discount allows me to lock in the price that I will be paying for the property, unless a competitive bidder just has to have the property, at which point they will be pusing their bid to a point where the discounted mtg purchase would be profitable to simply be paid off as a creditor.
e.g. 1st mtg of 100, 2nd of 50K, on a property with a FMV of 135K. I negotiate a purchase of the 2nd for 18K. This essentially locks in my purchase price to be 118K if I buy at Sheriff Sale… (or may put me in a position to take a deed in lieu of foreclosure from the owner, as another technique). If at a sheriff sale, a competitive bidder (maybe a retail buyer), bids this property to 135K, then I may simply stop bidding and take the 17K profit, by being paid off the 35K over the 100K 1st mtg; or a 17K profit on an 18K investment… Almost 100% profit on an investment of probably 120 days…
Just one example of how this can work out… there are many different ways to employ such strategies, depending upon what your ultimate game plan is.
Posted by Randy on September 07, 2003 at 11:20:04:
?Yield Spread Premium? is only one of the ways to profit buying notes; another is buying at a discount. Say you have a $100k 1st at 9% interest. An investor may offer to purchase that note for cash at 90% or $90k cash. That increases your yield to 10.2%. All of this is based on the debtor?s credit, underlying security (LTV) present yield.