Can home equity be used to buy discounted mortgages?? - Posted by Ben Buckley

Posted by David Butler America’s Note Network on April 30, 2000 at 14:57:31:

Hello Ben,

Well, there is a possible basis for a sound start with that kind of equity available, and there are some very plausible outcomes that can be achieved… subject to a number of variables:

  1. how old are your parents?
  2. what kind of income to they currently have?
  3. what is the income history over the past two years?
  4. what is the nature of the credit problems?
  5. will they be managing their own portfolio?
  6. will somebody else be managing their portfolio?
  7. is the portfolio manager well schooled on the issues
    I raised in my original reply?
  8. What are their immediate and short term needs?
  9. What is their risk tolerance profile?

Still a lot of ground to cover, so maybe you might want to go into a little more detail privately, and then I’ll see who I can hook you up with in the Seattle area. Lots of good folks up there… by the way, it might be a very good idea for you to sign up for our free bimonthly Ezine.

We post many reports there, and in the archives, including an important one coming out later this week entitled “The Care & Feeding Of Your Credit Report”, which covers a lot of “whys?” and “wherefores?”, that may be extremely useful in possibly improving the picture for your parents.

Just click on our banner above (NOT American Note, BTW ;-)), to sign up, and also to obtain our toll free number, if you would like to get more detailed information directly related to your situation. In the interim, tour our free library, and be sure to tour the excellent library right here on CREO, and John Behle’s Paper Game site. Many good articles at both locations that will familiarize you with a lot of principles of note investing… and they are free! Never look a gift horse in the mouth, right?!

Hope this helps, and best wishes

David P. Butler Vice President, Broker Relations

Can home equity be used to buy discounted mortgages?? - Posted by Ben Buckley

Posted by Ben Buckley on April 29, 2000 at 02:29:55:

My question is can a person who has equity in a property take a part of that equity out via an equity loan to buy discounted paper? Thus the income from the paper would not only pay the equity loan every month but also bring a profit. If this is possible what would be the best way to get the loan and second where could I find the paper to buy? Also what is considered a “good” dicount on paper? (i.e. 40%,50%,etc…) To anyone who shedds light on this I would like to thank you for your time.

Ben Buckley Seattle,Wa

Re: Can home equity be used to buy discounted mortgages?? - Posted by David Butler America’s Note Network

Posted by David Butler America’s Note Network on April 29, 2000 at 18:55:54:

Hello Ben,

Home equity loans are a tremendous source of funds for both discounted note buying and real estate investing. With the rates that have existed over the past couple of years, and some of the new highter LTV programs, it has been more lucrative than ever. In fact, we have had several occasions in the past two years where rates on some of these programs have been slightly less than many first mortgage programs, and much lower fees and closing costs.

However, like anything else, some of that will depend on each individual’s circumstances.

Best place to start on a home equity loan (or it’s close cousin, a home equity line of credit) is with your own bank. But do some shopping around first, so you have some idea of competitive rates and terms. Also, be sure your house is in order with regard to your credit profile and score. You may want to secure your own credit report ahead of time, just to double check for any inaccuracies. Many home equity programs are score driven, meaning qualifying criteria and interst rate improve, the better your credit score is.

Finding paper to buy can be a chore… many note brokers will tell you that that is often the hardest part of the business. But there is plenty of it out there. One of the quickest ways might be to hook up with a local note broker in your area. Of course, there are many other ways as well, but they are likely to take much more time and expense. Let me know what city and state you are in, and I’ll see if I can refer you to somebody.

By the way, many people make the mistake of investing in things they don’t know, or fully understand. This is usually the formula for disaster. In just the past two years, I am aware of at least 100 major fraudulent investment schemes that were popped by the SEC or local authorities. About 40% of these involved real estate or real estate paper frauds. Average losses per investor ranged from $22,000 to $250,000, depending on the scheme, and the number of suckers. These are awfully expensive seminars for most folks, and psychologically devasting too! None of us likes to feel like we were made chumps out of. Might be cheaper and more prudent to simply go through the bookstore here on this site, and pick out a few titles ahead of time - I am sure you’ll agree!

Nobody should invest in something they don’t have a good grasp on. If nothing else, you need to have an idea of what makes sense, and what kind of questions to be asking in the course of performing your own due diligence on anything you are looking to invest in.

There are several excellent little inexpensive books (less than $40) available on investing in discounted notes. One is William Broadbent’s OWNER WILL CARRY, which I believe is available on this site. Another very good book, is George Coats SMART TRUST DEED INVESTING IN CALIFORNIA, which works in any state (Unfortunately, I believe that book is currently out of print - I spoke to George last week, and it looks like there are some problems with the publisher that need to be resolved).

Jon Richards and Jon Behle also have some short courses that are fairly inexpensive. You’ll want to be familiar with the law in the state the property is in, and the various forms involved in purchasing a note, along with the checklists of things to investigate and do in the course of closing escrow.

Lastly, there is no such thing as a “good” discount, or “typical” discount for purchasing a note. Each note is exclusive unto itself, based on the creditworthiness of the Payor, the seasoning, the ITV, the position of the note (senior or junior lien), the rate and term of the note, and several other related factors.

Second notes and balloon notes have several other critical areas of investigation, and considerations that must be factored in. For example, if the second were to default on the first mortgage, do you have the financial strength to protect your position, and ride out a foreclosure action? There can be some stiff costs involved, and they can be exacerbated by bankruptcy filings, fraudulent transfers, and similar chicanery.

With balloons, you have some of the same considerations, plus the reality of an exit strategy. just because a note has a balloon, doesn’t mean the balloon will be paid on time, or paid at all. If you have sufficient equity to make it worthwhile to foreclose, and you are comfortable with taking that action, you could reap a windfall.

On the other hand, you may have other problems to overcome, one of which is a possible bankruptcy filing, and potential cram down on your payment. This can really have a negative impact on your rate of return.

A good discount is one that satisfies you, balances the risk/reward ratio for choosing to invest in this particular type of vehicle, and compares favorably to the alternatives available for your investment money, in relation to yield, liquidity, risk, and your personal likes and dislikes with regard to managing your investments.

Hope this helps, and best of luck!

David P. Butler Vice President, Broker Relations

Re: Can home equity be used to buy discounted mortgages?? - Posted by CarolFL

Posted by CarolFL on April 29, 2000 at 06:47:08:

Let me answer part of your question: talk with your local institutions (financial, not mental…) about a HELOC… Home equity Line of Credit. That gives you the flexibility to use or not use the line as opposed to a Loan which will be a one time thing.

Would suggest reading the articles here and on John site ( about finding and funding notes.

Discount will be a result of the yield you are after and the way the note is structured.

Happy reading.

Re: Can home equity be used to buy discounted mortgages?? - Posted by Ben Buckley

Posted by Ben Buckley on April 30, 2000 at 03:33:43:

Thanks for your advice. I live in Seattle,Washington. I am looking into this for my parents and let me give you a little info on them. They do not have very good credit and they have a first on the home of about $70,000 and the house is worth atleast 280,000. So do you think that a deal is still possible?

Thanks, Ben B.