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