Throughout my 17-year career in the note investing space, I’ve had the chance to speak at a number of seminars, webinars and social gatherings. I love to spread the word of what I do and in the process, hopefully get some interested parties to see the light and start investing in my world.
The Elevator Pitch
I remember when I first started out, I decided that I needed an “elevator pitch” when meeting new people who asked what I did for a living. It’d have to be a 20 second description of what I do that would sound interesting and intriguing.
Here are a few of the elevator pitches that I remember coming up with:
“I buy mortgage notes from banks and other financial institutions at really low prices. Then I get to speak with the homeowners and try to keep them in their homes by working around their financial situations. It’s a really rewarding job and can be extremely profitable as well.”
A lot of the people who I would use this pitch on suddenly had a glossy look come over their face. It’s like they were trying to understand what I did, but I threw too much at them at once.
“I’m a real estate investor who invests in buying distressed second mortgages all across the nation. I buy the notes at really low prices and get annual returns from 20-30%.”
The response I usually got from this one was, “don’t you mind kicking people out of the homes?” To which I responded, “No. It’s just the opposite. Because I buy these notes at such huge discounts, I get to be ultra-flexible in working with the homeowners and in most cases, I get the satisfaction of keeping them in their homes.”
With the help of some friends and the process of elimination, I was finally able to hone my elevator pitch to the following:
“I help people stay in their homes.”
With those seven words, most people were so intrigued that they instantly focused on me and asked me to elaborate. To which I would reply:
“I’ve come across an opportunity whereby I can purchase mortgage notes all across the country at ridiculously low prices. I can be anywhere in the world, as long as I have a computer and a phone. I get to work with homeowners, getting them back on their feet and best of all, I make good money doing it.”
What is it Exactly That You Do?
That’s the next question I get from friends, family, business associates and potential investors and students.
I first need to explain to them what a mortgage note is, what’s a non-performing note and why would banks ever want to sell their mortgage notes.
Simply put, a mortgage note is a legal document that obligates a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage, or a deed of trust that gives the lender a stake in the property.
In regards to what I invest in our second mortgage notes. A second mortgage, referred to as the Junior Lien, refers to any mortgage lien that comes after the first lien. Just like the first mortgage, it’s also secured by the real property.
The most common types of second mortgages are Home Equity Loans and Home Equity Lines of Credit (HELOC). The home equity loan is a fixed amount, payable in full over a specified term. The Home Equity Line of Credit is similar to a credit card; there is a credit limit you can borrow against and interest rates are typically adjustable.
What’s a Non-Performing Note?
Sometimes the homeowner is unable to make their payments on their first and/or second mortgages. The bank will try to communicate with the homeowner to try to find out why they’re unable to make payments. They’ll try to work with the homeowner (within the banks’ confines) to try to get them paying again. If the homeowner still can’t make payments, the bank has to decide whether it’s worth foreclosing on the loan or just sell the loan at a discount and write off what they can.
If the note becomes non-performing, the note is usually grouped with other non-performing notes and sold off to other investors. Once sold, the new owners of the note are entitled to collect whatever was owed to the previous mortgage holder at the time of the transfer of the note.
Is it Better to Invest in First or Second Mortgages?
This is by far the most asked question I get. People looking to start investing in notes seem to think that they should only invest in first mortgages because they heard from a friend that it’s too risky to invest in seconds.
While investing in seconds is a bit riskier than investing in firsts, it should in no way be the only deciding factor! The fact is, there are pros and cons to investing in both first and second mortgages.
Here are my thoughts:
- If you have the necessary capital, investing in first mortgages can be quite lucrative. Just remember that on average, you’ll be paying between $.50 – $.75 on the dollar for a first mortgage note. For example: if you buy a $100,000 first mortgage note, you’ll be paying between $50,000 – $75,000 for the note depending on the condition of the note.
- You’re in the first position (besides tax liens and HOAs), so you get to reap the rewards first.
- Your strategies are quite simple. Either the homeowner pays what you both agree to or you foreclose.
- Sometimes you can get the keys to the house in lieu of money that is owed to you, fix up the house and actually make more money than expected.
- Like first mortgages, second mortgages are also secured by the collateral of the property, giving you the “authority” to foreclose if necessary. Even though you’re in the second position behind the first.
- I love the fact that I can buy a second mortgage note anywhere from $.10 – $.30 on the dollar, compared with 1st mortgages, where you’re looking at $.50 – $.75 on the dollar. It’s a lot easier to start investing in seconds because of this.
- If someone wants to start investing and all they have is $10,000 – $20,000, they certainly can buy a lot more second mortgages than firsts.
- If you had $100,000, you could probably buy seven to nine second mortgage notes and if several of those mortgages defaults, there are still other notes left in the pool. With first mortgages, if you buy two mortgages for the same $100,000 and one of them defaults, that’s 50% of your investment.
- Buying second mortgages at substantial discounts affords you more flexibility than first mortgages and allows you to have more exit strategies to work out deals with borrowers.
- If the borrower defaults on their first mortgage, the lender has to start paying the insurance on the home as well as keeping up the house (landscaping, repairs, etc). This isn’t the case with second mortgages.
- The Return on Investment is usually greater with second mortgages than with first mortgages. Yes, there’s also greater risk!
If you’re looking for a great way to earn extra income and be your own boss, investing in distressed mortgages is an excellent opportunity. Deciding on which type of loans you should invest in depends on many factors, including some listed above.
In my next blog, we’ll be discussing some of the factors you need to address when investing in distressed notes.