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Buying Mortgage Note

Buying Mortgage Note

Good Investing Information from Noble Capital, Austin, Texas
It’s understandable that a prudent investor seeks to balance the best investment return with the amount of risk involved. To that end, one increasingly popular type of investment stands out from the rest - that of funding loans as a private lender. Investing as a private lender in this discussion simply means lending money to an individual borrower, who in turn pledges real estate as security for the loan. This is asset-based lending rather than credit-based lending where the private lender invests his money in a mortgage on real property, and the real property has a value at least equivalent to the loan. Generally, these private lending opportunities are sourced by a mortgage broker.

Investing as a private lender has risks and is not appropriate for everyone. With preservation of wealth becoming increasingly important as an investor approaches retirement age, investing hard-earned money in a mortgage can be an aggressive decision that should be completely reviewed and understood.

Several important recommendations can help reduce the risk:

I. Don't rush
All investments carry risk - some more than others. Investing as a private lender can span the entire range of volatility depending largely upon the terms of the mortgage being funded and quality of the property that secures the mortgage. Thus, the question to ask yourself is “How much risk can I afford to take?”

• There are a number of ways to invest as a private investor, and there are numerous mortgage opportunities that are looking to be funded.
• The risk reward ratio can be significant, with projected returns from privately funded mortgages increasing in direct proportion to the associated risks involved.
• Private lending is not generally recommended for inexperienced investors or anyone over the age of 65 that depend on their investment income to make ends meet.
• Private lender mortgage investments are not insured and mortgage investments cannot be guaranteed by the mortgage broker.

Despite what may look like an overly risky proposition, investing as a private lender stands a good chance of success and healthy returns if patience is exercised and experience is utilized.

II. Don’t try it alone
Private lending opportunities come in all shapes and sizes. Depending upon the situation, a private lender will either have the personal experience or need to retain the support of mortgage brokers, appraisers, title companies, escrow agents, loan servicing agents, construction compliance consultants, accountants, real estate brokers and lawyers. Not all of these services will necessarily cost the private lender, but trying to save money by making decisions without competent support is a license for failure.

III. Insist on full disclosure
Private lenders should rely to a large extent upon the mortgage broker for information. Texas law stipulates that mortgage brokers are required to provide each prospective investor with information about the investment, in the form of an Investor Disclosure Summary and supporting documents such as an appraisal and an agreement of purchase and sale, at least 48 hours before any commitment can be made. Better mortgage brokers will be able to provide a great deal more than just the mandated information. The quality of the information provided, the broker responsiveness and the comprehensiveness of the provided services are three important factors to consider when evaluating a mortgage broker.

Before making a final decision to fund the loan, a prudent private investor should also understand exactly how the loan will be serviced, how and in what likely time period the property could be disposed of in the event of a default and types of fees, if any, the private investor will be expected to pay.

III. Evaluate the buyer
Private investing for the purpose of this discussion means investing in a real estate note secured by a trust deed. This type of investment is considered an asset based investment, which means the value of the collateral is the primary security for the loan, but most privately funded loans also include personal borrower guarantees. Often, borrower’s looking for a privately funded loan do not have the time and/nor the credit to qualify for a lower priced bank loan. These buyers are willing to pay a significantly higher interest rate for a short period of time – often just long enough to qualify for a lower interest bank loan. Nevertheless, knowing about the buyer’s financial position, the amount of equity he has in his property, his credit history and his professional expertise can provide the private lender valuable insight into the borrower’s likely performance.

IV. Understand your investment options
The bottom line: if you want to invest as a private lender, you need to take time to carefully consider concept. Remember: preservation of capital is paramount. It took you a long time to save your money, why lose it because you’re in a hurry.

Discuss the information with your lawyer and accountant, as well as your family. Determine whether you possess the financial profile necessary to comfortably enter into a private lending opportunity. Savings investments guaranteed by deposit insurance are offered by banks, trust companies or credit unions. Of course the returns from these more conservative opportunities reflect the reduced risk involved. Compare these options with the investment you're considering

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