How can real estate investors use mortgage notes as a tool for getting better real estate deals?
Investing in mortgage loan notes has become much more popular in the last couple of years. That said, there has been a lot of hype over investing in debt. A lot of this stems from the need of big banking and lending institutions to shed hundreds of billions in bad debt. Sometimes this can be incredibly profitable. It can also have its pitfalls. Mortgage note investing has often been floated as a channel for acquiring underlying collateral properties at great bargains. However, the rules are changing, and this isn’t always a straight line for real estate investors. So what’s the best way for investors to really use mortgage notes as a tool and path to discounted real estate deals?
Mortgage Note Investing 101
While investing in notes is a new concept for many, it isn’t new by any means. In fact, most of our financial system is built on note investing. Banks and mortgage lenders make loans and receive promissory notes with real estate as collateral. They often sell off a large portion of these notes to those looking for high yielding investments. Obviously, that protocol ran into major issues when the foreclosure and credit crisis struck and millions defaulted on loans. Since then, more small firms and individual investors have been able to buy non-performing mortgage loan notes at a discount from these lenders. This is a cheaper and faster option for the note holder than going through the foreclosure process or having to deal with actual properties. With the economy and property markets improving, many of these defaulted loans are able to be brought back to performing status. Those buying them have the power to grant loan modifications and to make deals with borrowers to get them back on track. Performing loan notes can provide a good return on investment and a steady stream of passive income.
Pros and Cons of Mortgage Note Investing
The pros include potential for:
- Passive income
- Discounted investments
- Security of real estate as collateral
The potential cons include:
- Failure of borrower to perform
- Intensive management
- Having to deal with foreclosure and property management
Having a borrower default on a loan on a good property can be a great thing for real estate investors looking to fix and flip houses, or rehab and rent properties. Nobody wants people or businesses to go through distress or lose their properties, but it happens. And if you can help them get paid to do it, it can be a win-win for everyone. However, for most note investors, that is still a worst case scenario. They don’t want the time, expense or hassle of having to deal with late payments, foreclosure, or having to deal with a physical property.
How Note Investing is Changing
Note investing is changing. Access to notes opened up a lot over the past few years. They can be bought in bulk from big banks and government agencies, as well as through online portals. Some investors deliberately rushed to grab up sour notes in order to foreclosure and seize properties at a deep discount before reselling or renting them for cash flow. However, recent pools of notes being auctioned have included more stipulations. Sellers don’t want predatory buyers forcing thousands of homeowners or small businesses out of their properties if they can be helped. One of the glitches for those hoping to foreclose can be that you never know who is going to remain in default through foreclosure, or who is going to catch up.
So how can more real estate investors effectively, ethically, and reliably use this vehicle to get deals at a discount?
How & Who to Help
There are borrowers heading directly to foreclosure, or that need and want to sell their homes. This isn’t being a predatory investor. This is essentially adding a valuable and needed service. The challenge lies in connecting with this group.
There are many other ways to find these sellers: direct mail, online marketing, and knocking on doors. However, notes do add a unique channel which may not be as competitive as some of the other marketing options. If investors can get ahead of the crowd, they may be able to secure better deals, on better terms too.
The key is not just buying big pools of notes and hoping things work out the way you want, but honing in on those that want, and are ready for help. So how do you identify who needs help? Prove yourself to be a good partner in this and you could create steady streams of high ROI deals.
