Think I’m a Bank?Written by Mark Walter
Why so much excitement over real estate notes? The risks must be reviewed carefully. This article analyzes real estate notes from perspective of uninitiated. Before jumping into risks and possible rewards, we’ll examine how real estate transactions work when creating first mortgage notes. Second mortgage notes differentiate from first mortgage notes and involve more risk. Eventually, way note brokers value notes is another risk to consider very cautiously. While savviest real estate investors systematically invest in real estate notes, does it really makes sense for you? By way of comparison, some companies offer different methods of handling notes.To understand first mortgage notes, compare how banks resell notes. Likely you are aware that financial institutions routinely sell home mortgages to other lenders. At times, individuals who own their home free and clear become lender by financing their equity when they sell. Frequently these loans include a balloon payment, which is a large final payment. Balloon payments are often setup to come due within 10 years or less because sellers want cash quickly. When a seller decides to sell a note, you pay cash for note and begin receiving payments from borrower. Now that we have briefly considered first mortgage notes, we will consider second mortgages notes. Real estate transactions create second mortgage notes when seller finances only a portion of their equity. In these cases, buyer secures other financing for first mortgage. Legally, terms “first” and “second” refer to lien position of loan. Indicating priority, lien position determines which loan gets paid first in case of foreclosure or bankruptcy. Consequently, seconds, short for second mortgage notes, are considered somewhat riskier than first mortgages. Since they carry additional risk, banks routinely charge higher interest for second mortgages. Imitating banks, you will expect to earn breathtaking yields of 10%, 14% or more when you buy seconds or thirds. Whether it is sensible to purchase second or third mortgage notes depends on payor of note. The crucial factor in valuing a note continues to be reliability of payor. Significantly, most notes available for purchase have an owner occupant payor. If you purchase note through a note broker, broker will determine value of note using payor’s credit history. However, after you purchase note, payor’s situation may change. Collecting payments has then become your responsibility. Are you ready to be bill collector? Are you ready to renegotiate note? Are you ready to foreclose and resell house? While reliability of payor looms as a large consideration, savvy real estate investors reason like banks and charge forward into this lucrative industry. The savviest real estate investors love purchasing real estate notes whether first, second, or third mortgages. Essentially, this joy arises from their talent and experience at handling problems. When a note turns sour from nonpayment, these investors know how to collect, renegotiate, or foreclose. Consequently, they generate enormous cash flow from very safe investments. Very high yields of 10%, 14% or more motivate these investors. Realizing their note is secured on real estate and insured for hazards, they also know their note will be paid in full if occupant sells or refinances house. Not surprisingly, they consider second and third mortgages far better investment vehicles than stock market or mutual funds. These investors reason like banks do to achieve superior returns on their capital; you can level playing field by utilizing companies that handle grunt work and guarantee payments.
| | Making Outsized Returns in the Stock Market - Using the Dow TheoryWritten by Henry To, CFA
The Dow Theory It all began with Charles H. Dow...It is interesting and amazing to note that not until Charles Dow started compiling Dow Jones Industrial and Dow Jones Rail Index and started writing about stock market a little over a hundred years ago, stock speculation was regarded merely as a game for rich or as gambling for brave. Sure, there were tape readers, but majority of public regarded Wall Street as a source of excitement – entertainment provided freely (unless you were on wrong side) by figures such as Cornelius Vanderbilt, Jay Gould, and infamous Daniel Drew.
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