Investing Alternative
Sources To
Institutional
Lenders...
The opportunity
for individuals to
invest their money
in real estate mortgages has
been available for
many years.
But it
was not until money
became increasingly
tight in the late
70's and
the early 80's
that the idea caught
on with the public.
Although it is
possible for
individuals to
purchase GNMA
mortgage-backed
investment securities through
stockbrokers, many
individuals prefer
to invest in junior
mortgages that offer
yields
above rates offered
on bank and S&L
savings
certificates. These
are second, third,
and fourth mortgages
offered by mortgage
brokers. The reason
these mortgages
offer higher yields
than savings
certificates is that
they are riskier and
more illiquid.
Whereas bank and
S&L deposits are
insured by the FDIC
and FSLIC, if a
borrower stops
making payments on a
mortgage, the
investor has to
foreclose.
Foreclosing is
time-consuming,
expensive, and
usually results in a
financial loss to
the investor.
Furthermore, it may
be difficult to
resell a mortgage if
the investor does
not want to wait for
all of the
borrower's payments.
Banks and S&L
certificates usually
provide a means by
which a saver can
borrow against the
certificate or cash
it in.
The above-market
yields offered by
junior mortgages are
very attractive.
However, one must
also realize that
when a borrower
offers to pay a
substantial premium
over the best loan
rates available from
banks and savings
and loan
associations, it is
because the borrower
and/or the property
probably does not
qualify for the best
rates. Before
investing, a
mortgage investor
should have the
title to the
property searched.
This is the only way
to know for certain
what priority the
mortgage will have
in the event of
foreclosure. There
have been cases
where investors have
purchased what they
were told to be
first and second
mortgages only to
find in foreclosure
that they were
actually holding
third and fourth
mortgages on overencumbered
property.
And how does one
recognize an
overencumbered
property? By having
it appraised by a
professional
appraiser who is
independent of the
party making or
selling the mortgage
investment. This is
compared to the
existing and
proposed debt
against the
property. The
investor should also
run a credit check
on the borrower. The
investor's final
protection is,
however, in making
certain that the
market value of the
property is well in
excess of the loans
against it and that
the property is
well-constructed,
well-located, and
functional.
Investing
In Mortgages To Land
Leases
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