Everyone who has invested in stocks, commodities, real estate and hard assets knows every investment type has its own hurdles, customs, costs and timetables. When we talk with people about investing in mortgage notes, most are fascinated with the possibilities offered by being the bank. Very few, however, have any idea about how the process works. We think educated investors are better buyers, so this page offers a brief explanation about the ins and outs of mortgage note investing.
Our investment targets are first mortgage loans on single family homes across the United States. We are sometimes offered single notes from current owners. Many originated as owner-carry property sales. As long as such notes were professionally prepared and resalable,
It is common custom for experienced sellers to ask potential buyers to sign non-disclosure agreements (NDAs) to protect both their own economic interests and the privacy of borrowers. Once we identify desirable acquisition targets, we submit offers. If our offers are accepted, we sign purchase agreements and sellers establish closing dates and effective dates. Closing dates are the dates when buyers are expected to transfer funds. Effective dates are the times when incoming mortgage payments officially shift from sellers to buyers. Transactions often take 30 to 60 days, so payments received after effective dates are considered the properties of buyers.
The next crucial step is for sellers to retrieve pertinent loan documents from their secure storage facilities and send them to buyers. Around the same time, but usually a short time later, buyers prepare transfer documents that officially record assignments of notes to new buyers. The number and types
It is important to realize that the most important documents involved (the notes) are originals. They contain notarized original signatures of borrowers and are therefore conclusive proof of ownership. It is highly important to keep such documents safe from fire and natural disaster. Storage can range from placement in bank safe boxes to special bonded and insured document storage facilities.
The entire loan management process is known as servicing. Practically all professional investors contract with professional loan servicing companies which handle collections of payments from borrowers and disbursement of funds to pay for insurance and taxes. The initial phase of setting up newly-acquired loans with servicers is known as boarding loans.
Collecting mail box money
Depending on investors’ payment preferences and servicers’ capabilities, monthly payments from borrowers are credited to investors’ accounts within hours of receipt. Sometimes within seconds! Although servicers usually charge extra for physical payments, some investors still prefer to receive payments by check. Regardless of whether payments are transmitted by the Postal Service or through the Automated Clearing House (ACH) system, investors often refer to their monthly mortgage cash flow as mail box money.
Investors who have bought Treasury products (Treasury bonds, Treasury notes, T-bills) know that no one needs to hold U.S. government debt to maturity. Treasury debt can be bought and sold freely. Yields at the times of transactions have nothing to do with interest rates determined at the time of initial purchase. Similarly, mortgage loans on residential
Everyone who has been around investing for more than a few hours understands that every investor has different goals and those goals will morph and change with time, availability of funds and changes in personal situations. Some investors enjoy stable and predictable cash flow
Managing downside risk
Regardless of the type of investment, the time to deal with risk is prior to purchase. With the exception of the effects of early payments, yields from mortgage notes are essentially fixed from the times of purchase. Consequently due diligence analyses are of primary importance in limiting and managing downside risk. Please see the page Asset Analysis for a more in-depth discussion.
We acquire mortgage notes, both for our own portfolio and for possible resale to other investors as either whole notes or partials. With the exception of specific notes that investors request us to buy for them, we vet all notes that we buy. We do not buy any note we are unwilling to hold.
We want everyone to understand that we are not in the business of buying perfect notes. Yields would be much too small for our analysis and acquisition efforts.
Rather, we seek notes that are good balances between risk and reward. Only after we have analyzed, acquired, recorded and boarded our mortgage notes do we consider offering notes to other investors. Our offerings might include partials with the first five to ten years of payments or they might include entire notes. It all depends on how much we know about our investors’ goals.
Planning for possible sale from the beginning
When selling notes, either full-term or partials, we maintain personal control of all documents up until the time of sale. That way, we can greatly shorten the time periods required for transfer. Moreover, we choose reliable loan servicers so that purchasers can use the same companies,
When investors express interest in assets
Regardless of the initial work we might have performed in vetting assets, we specifically warn potential investors to do their own due diligence. They should never purchase an asset or any part thereof before believing in what they are buying. To that end, we give all information
When investors decide to purchase assets
We personally experience all the steps of the buying process in acquiring our assets. Therefore, when it comes time to sell, we are ready to share our knowledge with buyers. While we may not succeed with every sale, our goal is to make note buying as easy and as painless as possible.