You don’t have to be a sophisticated investor to sell a mortgage, although conventional thinking leads us to believe that only the most astute and risk taking investor will venture into this arena. The fact is that once you understand the process, selling notes is in many respects much simpler than marketing and closing on an actual property. And simplicity of transaction equals consolidation of dollars and reduction of your most precious commodity – time. Taken together, these factors often add up to a shorter path to a greater return on your investment.
Here are some of the things to consider when selling a mortgage note:
1) The note will be more valuable if the interest rate on the loan is higher than prevailing interest rates, because buyers will see it as an opportunity to generate higher returns. Sometimes, for instance, a owner/seller-financed home sale will involve a mortgage with a higher rate, because “owner financed” property sometimes sells to buyers who are otherwise not able to get a loan. This doesn’t necessarily mean they are at a higher risk for default, however, and if you find a mortgage with a good payment history and a high interest rate, this can be a wonderful investment opportunity.
2) Balloon payment notes that are about to come due may seem like a great bargain, because you will get a huge payment soon if you own the loan. But often these loans are trouble in disguise, because if the debtor defaults, you can end up in foreclosure proceedings, and perhaps eligible for only a partial payment on the note. Selling this kind of note can sometimes be difficult unless you sell it for a discount, especially if the person paying on the mortgage has trouble making their payments on time.
3) The same can hold true for loans that don’t mature for a long time – say for example, a conventional 30-year mortgage – because your potential buyer may want to “cash in” sooner. For that reason, a 5-10 year note will typically be more popular with those shopping around for mortgages to buy, and a 3-5 note may bring an even better price.
4) If you have ever applied for a loan to buy a home, you can apply – no pun intended – the lessons you learned from that process to your knowledge of selling a mortgage. The bank you borrowed from checked your credit rating, did an appraisal of the property, and evaluated your ability to produce enough income to make your monthly payments. When you decide to sell a mortgage, the same kinds of criteria will be involved in determining the value of your mortgage note. If you have lots of equity in the house, and the note as a long history of timely payments, for instance, it is probably a sound investment and will fetch a higher price when sold to an investor. If the property is in disrepair and the payment history is sketchy, investors will be hesitant to buy the mortgage, unless it is sold at a deep enough discount to help them offset any expensive problems.
Pinnacle Investments
Email: info@pinnacle-investments.com
www.straighttalkforrealestateinvestors.com
Monday, July 7, 2008
Thursday, July 3, 2008
Investing In Notes
How to Buy Property That “Looks Good on Paper” to Take Advantage of Investments So They Don’t Take Advantage of You
What is a Real Estate Note you ask? Well let me tell you. A note is simply an IOU. A payor has promised to pay someone else, called a seller/lender, a certain amount of money. The payor may agree to pay interest on the money, and to pay part of it back in daily, weekly, monthly, yearly installments or in one lump sum in the future. We, as note buyers, will buy that IOU from the Note Holder (i.e. the person receiving the payments) for a lump sum of cash now. How much we will pay depends on the discount we can convince the beneficiary to take from the face amount of the note.
Any seasoned real estate professional can recite a litany of anecdotes about investments that looked really great on paper, but in reality were a Pandora’s box of costly problems.
For example:
1) An investor buys a commercial property in an up-and-coming section of town, expecting to lease it for the short term and then cash in on the predictable spike in real estate values, to make money on both ends.
The following year a national development company opens a shopping mall on the other end of town, draining all the consumer traffic away and creating a rush to open stores closer to the mall. The investor’s property sits empty as the equity vanishes, replaced by monthly debts that cannot be offset.
2) A homeowner decides to fix up a garage and convert it into a rental apartment.
The extra income will be enough to pay the mortgage on the house, which will essentially transform an empty garage into an investment project that produces a steady cash flow while the equity of both properties – the house and the new garage apartment – rise.
Before the renovation is completed – but long after legal agreements are made with contractors to do the work and the building materials are delivered to the site – the local preservation society manages to get the neighborhood included in the state historical record. No new construction is allowed under the strict guidelines, which are imposed to discourage modernization. The plan to rent out the garage is now against the law, but if the contractors are not paid for their materials and contracts, they can impose a lien on the main house in lieu of payment.
3) An investor finds a vacant apartment complex in need of repairs, but the cost of
repairs is minimal compared to the immediate income and cash flow that can be
had by renting out the property to military families at the nearby Naval station.
The repairs are completed ahead of schedule and a newspaper and billboard marketing blitz is planned, in order to fill up the thirty units as soon as possible. An ad agency is hired and completes their plans.
But two weeks before the planned ribbon-cutting ceremony and launch of the publicity campaign, the government closes the base and ships the personnel and equipment elsewhere, in order to save money and streamline the organization.
Although these are fictional stories, they demonstrate the fact that although in real estate “location is everything”, it doesn’t mean that location is always a good thing, or a dependable one.
And other factors can bite into the profit margins of a real estate investment project before it reaches completion. These include unexpected spikes in the cost of repair materials (due to everything from hurricanes on the other side of the country to inflated prices at your local gas station), inclement weather (which can delay projects like pouring concrete, painting an exterior, or repairing a weak foundation), fluctuations in the labor market, and a variety of other issues.
Many investors finally opt out of the hands-on real estate game completely, or decide to at least supplement some of their investments in physical “brick and mortar” property with a portfolio of real estate debt notes or mortgage paper.
At a time when interest rates are rising – making debt instruments more attractive in the short term, many investors are looking for alternatives to low-yield instruments, such as bank certificates of deposit and Treasury notes. They frequently find higher returns and plenty of liquidity in the market for real estate paper, which not allows offers better short-term yields, but the opportunity for long-term or time-staggered investment strategies as well.
And when rates rise, the stock market has historically gone bearish. But by the time most people figure out that their gains in the stock market are dwindling, it is often too late to get into the bond market, because the bargains are gone. Those who keep a strong portfolio of real estate paper, however, can potentially profit from both economic climates, and enjoy the diversity of owning real estate as part of a well-rounded investment allocation plan, but without the day to day risk of being a developer, landlord, or rehab project manager.
Regardless of what kind of investor you are, real estate notes or “mortgage paper” can provide diversification, cash flow, and hassle-free convenience. Ask your local real estate note broker to explain how a real estate investment that looks good on paper can also be found through the global market for real estate-based paper debt transactions.
Wednesday, June 25, 2008
Investment Companies Providing Opportunities Banks Can’t
There are even more reasons why a trust deed investment company would be needed, even by ordinary individuals. Every lending product is different, and banks and trust deed investment companies have very different regulations covering their activities.
Let’s take a look at the imaginary scenario of a man named Jeff. He wins the lottery and splits the jackpot with a group of friends so that he walks away with 4 million, after taxes. He’s opted to receive the money in annual payments over the next 10 years. He decides he wants to use part of the money to build a 12,000-square-foot house on the shores of Lake Tahoe. However, a 12,000-square-foot, completely elephant proof house will cost him $4 million and he’s opted to take his jackpot earnings in annual payments. He doesn’t have all the money up front. So what does he do? Can he go to the bank? Maybe. But the Federal Institutions regulatory and Reform Enforcement Act (FIRREA) limits the amount of money banks can loan to any one borrower. So Jeff puts up $500,000 and approaches his good friend Millionaire Mack, asking him to lend Jeff the remaining half a million. Millionaire Mack agrees, but only if he can charge a 12% interest rate and can secure the loan with the lakefront property and home.
In real life, trust deed investment companies fulfill the role of Millionaire Mack in the above example with the difference that, in real life, Millionaire Mack would serve as the intermediary. Someone behind the scenes-an investor-would have given Mack the money to loan Jeff. This system works well for Jeff, though, because Millionaire Mack is willing to loan Jeff as much money as he needs.
Trust deed investment companies operate in a similar manner. They sky’s the limit when it comes to how much money trust deed investment companies can loan to any one borrower. They’re not under the same chokehold as banks in regards to lending limits. Some of the other reasons that trust deed investment companies might be needed instead of banks are: there is something unusual about the borrower, there is something unusual about the property, oor there is insufficient equity. These categories can include specifics like: the borrower has a low credit score (perhaps they managed their money well enough never to need credit?!), too many late payments on loans (which is a negligible risk when the property is held as security), opr a property which seems undervalued (which is easily fixed by requiring a higher interest rate or different terms). Trust deed investment companies are in a position to be flexible about these things, and so can serve a market that the rigidly regulated banks, bastions of bureaucracy that they are, can not serve.
Therefore people in unusual situations, or with specialized money-making methods, can get the money they need to keep their own millionaire dreams chugging along, all the while fueling others’ dreams in the great circle of life!
Let’s take a look at the imaginary scenario of a man named Jeff. He wins the lottery and splits the jackpot with a group of friends so that he walks away with 4 million, after taxes. He’s opted to receive the money in annual payments over the next 10 years. He decides he wants to use part of the money to build a 12,000-square-foot house on the shores of Lake Tahoe. However, a 12,000-square-foot, completely elephant proof house will cost him $4 million and he’s opted to take his jackpot earnings in annual payments. He doesn’t have all the money up front. So what does he do? Can he go to the bank? Maybe. But the Federal Institutions regulatory and Reform Enforcement Act (FIRREA) limits the amount of money banks can loan to any one borrower. So Jeff puts up $500,000 and approaches his good friend Millionaire Mack, asking him to lend Jeff the remaining half a million. Millionaire Mack agrees, but only if he can charge a 12% interest rate and can secure the loan with the lakefront property and home.
In real life, trust deed investment companies fulfill the role of Millionaire Mack in the above example with the difference that, in real life, Millionaire Mack would serve as the intermediary. Someone behind the scenes-an investor-would have given Mack the money to loan Jeff. This system works well for Jeff, though, because Millionaire Mack is willing to loan Jeff as much money as he needs.
Trust deed investment companies operate in a similar manner. They sky’s the limit when it comes to how much money trust deed investment companies can loan to any one borrower. They’re not under the same chokehold as banks in regards to lending limits. Some of the other reasons that trust deed investment companies might be needed instead of banks are: there is something unusual about the borrower, there is something unusual about the property, oor there is insufficient equity. These categories can include specifics like: the borrower has a low credit score (perhaps they managed their money well enough never to need credit?!), too many late payments on loans (which is a negligible risk when the property is held as security), opr a property which seems undervalued (which is easily fixed by requiring a higher interest rate or different terms). Trust deed investment companies are in a position to be flexible about these things, and so can serve a market that the rigidly regulated banks, bastions of bureaucracy that they are, can not serve.
Therefore people in unusual situations, or with specialized money-making methods, can get the money they need to keep their own millionaire dreams chugging along, all the while fueling others’ dreams in the great circle of life!
Monday, June 16, 2008
Anything Can Happen
We know that investing can actually be a very creative thing, and there is rarely a best path to making money. However, along with this creativeness comes a need for great communication, systems which work and are followed to the letter, and impeccable record keeping. Here are just a few examples of ways your investment might vary, and how a trust deed investment company makes it all very simple and safe for you.
Some trust deed investment companies charge prepayment penalties to borrowers who pay off early. Others companies, happy to get their money back waive the penalty.
Occasionally, a loan extends. A commercial shopping center that doesn’t have enough tenants to get a permanent long-term loan is a prime example. The center is leasing fast, the borrower has enough money to continue paying the trust deed loan and asks to extend the loan for six months. Who decides if the extension happens? The trust deed investment company? No, you, the investor make the call. And here’s where communication comes into play. The trust deed investment company must contact all the investors involved and ask how they want to proceed. Depending on how much money each investor has loaned, not all investor must agree to the extension in order for the loan to continue.
Communication loan extension and /or early payoffs requires efficient and timely accounting and date processing. Because commercial trust deed loans routinely involve millions of dollars in transactions, a seasoned and experienced firm that can expertly juggle these transactions is a definite asset for the investor. Consequently, customer service is as important as your investment itself. The other most important aspect of a relationship is trust. The best way to establish trust, in this case, is to check out your trust deed investment company. Ask about their license, and what was involved in getting it. Ask about their employees, how they came to be in trust deed investing, what qualifications they have, and what experience they have. Ask about their past clients: what they thought were their big successes, and what losses they have had. All this knowledge helps you feel comfortable around them, and creates a great and trusting working relationship between you both.
The best news of all is that you’re not actually paying the trust deed investment company a fee or a commission to make use of its knowledge and efficiency. The borrower pays this cost. The trust deed company does need you to make it’s money; but then again, you need it to make your money! It’s really a great situation, where everybody gets something they need.
In the end, it’s about relationships. The relationship between you and the trust deed investment company should be one of mutual understanding. The strength of this relationship will make investing in trust deeds pleasant and profitable. In fact, you may look on trust deeds as a financial form of CPR, since they can breathe new life into your IRAs and savings accounts.
Some trust deed investment companies charge prepayment penalties to borrowers who pay off early. Others companies, happy to get their money back waive the penalty.
Occasionally, a loan extends. A commercial shopping center that doesn’t have enough tenants to get a permanent long-term loan is a prime example. The center is leasing fast, the borrower has enough money to continue paying the trust deed loan and asks to extend the loan for six months. Who decides if the extension happens? The trust deed investment company? No, you, the investor make the call. And here’s where communication comes into play. The trust deed investment company must contact all the investors involved and ask how they want to proceed. Depending on how much money each investor has loaned, not all investor must agree to the extension in order for the loan to continue.
Communication loan extension and /or early payoffs requires efficient and timely accounting and date processing. Because commercial trust deed loans routinely involve millions of dollars in transactions, a seasoned and experienced firm that can expertly juggle these transactions is a definite asset for the investor. Consequently, customer service is as important as your investment itself. The other most important aspect of a relationship is trust. The best way to establish trust, in this case, is to check out your trust deed investment company. Ask about their license, and what was involved in getting it. Ask about their employees, how they came to be in trust deed investing, what qualifications they have, and what experience they have. Ask about their past clients: what they thought were their big successes, and what losses they have had. All this knowledge helps you feel comfortable around them, and creates a great and trusting working relationship between you both.
The best news of all is that you’re not actually paying the trust deed investment company a fee or a commission to make use of its knowledge and efficiency. The borrower pays this cost. The trust deed company does need you to make it’s money; but then again, you need it to make your money! It’s really a great situation, where everybody gets something they need.
In the end, it’s about relationships. The relationship between you and the trust deed investment company should be one of mutual understanding. The strength of this relationship will make investing in trust deeds pleasant and profitable. In fact, you may look on trust deeds as a financial form of CPR, since they can breathe new life into your IRAs and savings accounts.
Tuesday, June 10, 2008
When Back - to - Back Becomes Simultaneous
One of the most common investment strategies employed by those who buy and sell property for a short-term gain is back-to-back close. As the term indicates, this technique involves two closings – or completed real estate transactions – which happen at essentially the same time.
For example, many times the scenario happens wherein a homeowner decides to move, and they plan to use the proceeds of the sale to buy a new house. Once they get an offer to purchase their first home, they go shopping for another one. But they can’t afford to buy it until the sale of their first house is completed. In this kind of situation, they may elect to schedule two closings – back to back – at their attorney’s office. First they close the sale, and then they turn right around and close the purchase of their new home.
Using this kind of basic concept, investors sometimes tighten the time frame even more. Rather than buying a house and then borrowing money to fix it up to generate equity or buying one and assuming the duties of a landlord in order to make a profit, the investor simply buys a property and sells it at the same time. While signing the paperwork to buy the property, the buyer also sells it to someone else, so the entire investment cycle is completed within a matter of minutes, not months or years. The closing attorney has all the paperwork for all of the components of the transaction drawn up and signed at the same meeting, all the parties convene at the same time, and the “signing party” begins and ends and all of the buying and selling occurs at one sitting.
But another more complex variation on this strategy is what brokers refer to as the “simultaneous close”. These closings are often used as clever tools for those who sell property by using owner financing but don’t really want to carry the mortgage loan for an extended time. These sellers don’t intend to be note holders, but are simply trying to figure out a way to help their buyers come up with the financing necessary to purchase the house. As soon as the sale is completed, these owner-financing sellers are interested in selling the mortgage note to an investor who will give them a lump sum of cash in payment. This allows the seller to “cash-out” of the transaction and not assume any responsibility for actually collecting monthly payments or carrying an extended mortgage for the new buyer. Because it all takes place at one sitting, the simultaneous close is also called a “table closing”.
For this kind of transaction to go smoothly, the seller (who wants to sell the house and the new mortgage at the same time) must take care to meet specific legal guidelines that exist to prevent lenders from charging unfairly high interest rates. If the seller accepts payment for the property, agrees to carry the mortgage, but sells the note immediately, it might be construed that the seller is trying to hide from the role of “lender” to avoid compliance with all laws pertaining to fair lending practices. In other words, the seller wants the convenience of making a loan, and only for a moment – long enough to get the deal signed and done. But within that moment the seller may incur the entire legal responsibility of a lender, and not disclosing that in a totally transparent fashion can be a violation of the law.
The seller also needs a qualified note buyer – who understands the complexities of simultaneous closings and other loan instrument procedures – to purchase the mortgage. Because delays or failures to comply to rules and regulations can be costly, the seller who wishes to take advantage of a simultaneous closing is strongly encouraged to seek expert advice from experienced, certified, financially stable mortgage brokers before entering into this kind of transaction.
Those who find a legitimate broker or buyer of notes to partner with may be able to enjoy the convenience of walking away with cash in hand, but never lose sleep about the future legal or tax consequences of actions. If a simultaneous closing is not appropriate to help an investor or seller meet his or her financial goals, a qualified and competent mortgage broker will understand and recognize those facts, counsel the client, and then offer advice and alternative strategies and plans for a more desirable course of action.
Pinnacle Investments
Email: info@pinnacle-investments.com
www.pinnacle-investments.com
For example, many times the scenario happens wherein a homeowner decides to move, and they plan to use the proceeds of the sale to buy a new house. Once they get an offer to purchase their first home, they go shopping for another one. But they can’t afford to buy it until the sale of their first house is completed. In this kind of situation, they may elect to schedule two closings – back to back – at their attorney’s office. First they close the sale, and then they turn right around and close the purchase of their new home.
Using this kind of basic concept, investors sometimes tighten the time frame even more. Rather than buying a house and then borrowing money to fix it up to generate equity or buying one and assuming the duties of a landlord in order to make a profit, the investor simply buys a property and sells it at the same time. While signing the paperwork to buy the property, the buyer also sells it to someone else, so the entire investment cycle is completed within a matter of minutes, not months or years. The closing attorney has all the paperwork for all of the components of the transaction drawn up and signed at the same meeting, all the parties convene at the same time, and the “signing party” begins and ends and all of the buying and selling occurs at one sitting.
But another more complex variation on this strategy is what brokers refer to as the “simultaneous close”. These closings are often used as clever tools for those who sell property by using owner financing but don’t really want to carry the mortgage loan for an extended time. These sellers don’t intend to be note holders, but are simply trying to figure out a way to help their buyers come up with the financing necessary to purchase the house. As soon as the sale is completed, these owner-financing sellers are interested in selling the mortgage note to an investor who will give them a lump sum of cash in payment. This allows the seller to “cash-out” of the transaction and not assume any responsibility for actually collecting monthly payments or carrying an extended mortgage for the new buyer. Because it all takes place at one sitting, the simultaneous close is also called a “table closing”.
For this kind of transaction to go smoothly, the seller (who wants to sell the house and the new mortgage at the same time) must take care to meet specific legal guidelines that exist to prevent lenders from charging unfairly high interest rates. If the seller accepts payment for the property, agrees to carry the mortgage, but sells the note immediately, it might be construed that the seller is trying to hide from the role of “lender” to avoid compliance with all laws pertaining to fair lending practices. In other words, the seller wants the convenience of making a loan, and only for a moment – long enough to get the deal signed and done. But within that moment the seller may incur the entire legal responsibility of a lender, and not disclosing that in a totally transparent fashion can be a violation of the law.
The seller also needs a qualified note buyer – who understands the complexities of simultaneous closings and other loan instrument procedures – to purchase the mortgage. Because delays or failures to comply to rules and regulations can be costly, the seller who wishes to take advantage of a simultaneous closing is strongly encouraged to seek expert advice from experienced, certified, financially stable mortgage brokers before entering into this kind of transaction.
Those who find a legitimate broker or buyer of notes to partner with may be able to enjoy the convenience of walking away with cash in hand, but never lose sleep about the future legal or tax consequences of actions. If a simultaneous closing is not appropriate to help an investor or seller meet his or her financial goals, a qualified and competent mortgage broker will understand and recognize those facts, counsel the client, and then offer advice and alternative strategies and plans for a more desirable course of action.
Pinnacle Investments
Email: info@pinnacle-investments.com
www.pinnacle-investments.com
Friday, June 6, 2008
Keeping A Piece of the Action
Although debt paper can take many forms, ranging from mortgage notes to lottery winnings annuity contracts; we can usually describe the loan notes held by brokers and investors by placing them into one of two basic categories:
1) First lien notes that they can sell for a lump sum.
These notes have a beginning and an end, and when they are paid off, the note is canceled and no longer represents any debt.
2) Second lien notes that may be much smaller but offer the security of regular and gradual monthly installments of income.
These notes are created to take advantage of equity, for instance, and represent a new loan that will be paid off after the first lien has been satisfied. If someone owns a house with a first lien mortgage of $300,000 and they later borrow $15,000 against the value of their house in order to update a bathroom; the smaller note becomes the second lien.
By simply slicing up some of their debt paper pie, brokers can have their cake and eat it too, by creating a portfolio of diversified investments. Rather than putting all their eggs in one basket by only investing in first lien debt, they can rely on both short-term payments and longer-term payouts, by choosing to restructure some of their inventory of notes.
For example, if an investor wants to have a steady stream of income – maybe to plan for retirement or to help add principle to a college tuition savings account – the notes can be created with different maturation dates. By staggering the payments so that there are always some notes coming due while others are still “ripening”, the investor enjoys predictable monthly cash flow.
When the government advertises and sells treasury notes, the same idea is used to attract buyers. You can buy short-term notes of a year or less, and you can buy notes that don’t mature for many years. You might buy a long-term note to help finance a child’s education, and let the note sit for 15 or 20 years. A short note – say three years or less – might be more advantageous if you are planning to pull money out of the stock market temporarily and let it accumulate interest only until the next stock market upswing.
When a first lien note is sold, the seller gets paid and the lien is removed. As far as the seller is concerned, there is no more action to be had in that particular note and it is time to look for another investment. But if the seller creates a second lien on the note, the transaction becomes two-tiered. Even though the first note is paid off in full, the paper is still active because of the remaining second note. The entire note may be for $100,000, and the second lien is only for $10,000 – but several of these smaller notes taken together can represent a substantial investment portfolio, with a prudent level of built-in diversity.
Brokers who trade in debt paper often keep an inventory of various types of notes, so that they can tailor their investment packages to suit a client’s needs. And those who find themselves with mostly first lien notes can create smaller second liens, to automatically gain a diverse portfolio with twice as many options and opportunities.
1) First lien notes that they can sell for a lump sum.
These notes have a beginning and an end, and when they are paid off, the note is canceled and no longer represents any debt.
2) Second lien notes that may be much smaller but offer the security of regular and gradual monthly installments of income.
These notes are created to take advantage of equity, for instance, and represent a new loan that will be paid off after the first lien has been satisfied. If someone owns a house with a first lien mortgage of $300,000 and they later borrow $15,000 against the value of their house in order to update a bathroom; the smaller note becomes the second lien.
By simply slicing up some of their debt paper pie, brokers can have their cake and eat it too, by creating a portfolio of diversified investments. Rather than putting all their eggs in one basket by only investing in first lien debt, they can rely on both short-term payments and longer-term payouts, by choosing to restructure some of their inventory of notes.
For example, if an investor wants to have a steady stream of income – maybe to plan for retirement or to help add principle to a college tuition savings account – the notes can be created with different maturation dates. By staggering the payments so that there are always some notes coming due while others are still “ripening”, the investor enjoys predictable monthly cash flow.
When the government advertises and sells treasury notes, the same idea is used to attract buyers. You can buy short-term notes of a year or less, and you can buy notes that don’t mature for many years. You might buy a long-term note to help finance a child’s education, and let the note sit for 15 or 20 years. A short note – say three years or less – might be more advantageous if you are planning to pull money out of the stock market temporarily and let it accumulate interest only until the next stock market upswing.
When a first lien note is sold, the seller gets paid and the lien is removed. As far as the seller is concerned, there is no more action to be had in that particular note and it is time to look for another investment. But if the seller creates a second lien on the note, the transaction becomes two-tiered. Even though the first note is paid off in full, the paper is still active because of the remaining second note. The entire note may be for $100,000, and the second lien is only for $10,000 – but several of these smaller notes taken together can represent a substantial investment portfolio, with a prudent level of built-in diversity.
Brokers who trade in debt paper often keep an inventory of various types of notes, so that they can tailor their investment packages to suit a client’s needs. And those who find themselves with mostly first lien notes can create smaller second liens, to automatically gain a diverse portfolio with twice as many options and opportunities.
Thursday, June 5, 2008
Give The People What They Want
The real estate market has the potential to produce such lucrative investments, that there is stiff competition for the best places, and many people who spend a great deal of time scouring their sources for potential big earners. In real estate investing, every day counts – you can’t necessarily sit on your idea, mulling it over for a week. Someone less cautious and risk averse as you will come along and snap up the offer while you are looking the other way!
Real estate developers often move fast to acquire property, or they risk losing out on a choice opportunity. The clock is tick, tick, ticking away for them. Consequently, developers may opt to avoid banks, which can take 90 to 120 days to fund a loan. Trust deed investment companies, on the other hand, can fund a loan in less than 30 days. Therefore, trust deed investment companies-despite their higher interest rates-are a developer’s best friend.
Usually, developers don’t mind paying higher interest rates because they know trust deed investment companies set up a short lending term. Unlike home mortgages, which last from 15 to 30 years, trust deed loans typically last about one year-36 months at the most. Consequently, commercial real estate developers can obtain the money as soon as they need it, knowing the high interest rate is temporary. When the term expires, they can find a lower interest rate elsewhere.
The other reason that people turn to trust deed investment companies rather than banks is that the bank won’t give them a loan. This is usually for one of three reasons – either there is something wrong with the borrower, there is something wrong with the property, or there is insufficient equity. Some things that might happen to make the institution think there is something wrong with the borrower are: their credit score being too low, or no source of income to pay back the loan. As many of you may know, there is a variety of reasons you may have a low credit score, the most incongruous of which is the fact that you have managed your money well enough to never need credit! However, most single problems can be overcome easily, with a little flexibility and lateral thinking. The only reason that banks can afford to turn away these loans is that they have economies of scale on their side – they don’t necessarily need every single loan, and they prefer very high security over much higher return on their own investments.
So basically, borrowers who need a lot of money fast are very well served by trust deed investment companies. They are able to temporarily trade off having a low interest rate for being the ones to get the deal, which they hope will make them much more money than the pittance they paid as extra interest! Neither are these loans unethical, in that they lock in people desperate for cash to overblown interest rates – they are simply fulfilling a need in the market, and serving both parties.
Real estate developers often move fast to acquire property, or they risk losing out on a choice opportunity. The clock is tick, tick, ticking away for them. Consequently, developers may opt to avoid banks, which can take 90 to 120 days to fund a loan. Trust deed investment companies, on the other hand, can fund a loan in less than 30 days. Therefore, trust deed investment companies-despite their higher interest rates-are a developer’s best friend.
Usually, developers don’t mind paying higher interest rates because they know trust deed investment companies set up a short lending term. Unlike home mortgages, which last from 15 to 30 years, trust deed loans typically last about one year-36 months at the most. Consequently, commercial real estate developers can obtain the money as soon as they need it, knowing the high interest rate is temporary. When the term expires, they can find a lower interest rate elsewhere.
The other reason that people turn to trust deed investment companies rather than banks is that the bank won’t give them a loan. This is usually for one of three reasons – either there is something wrong with the borrower, there is something wrong with the property, or there is insufficient equity. Some things that might happen to make the institution think there is something wrong with the borrower are: their credit score being too low, or no source of income to pay back the loan. As many of you may know, there is a variety of reasons you may have a low credit score, the most incongruous of which is the fact that you have managed your money well enough to never need credit! However, most single problems can be overcome easily, with a little flexibility and lateral thinking. The only reason that banks can afford to turn away these loans is that they have economies of scale on their side – they don’t necessarily need every single loan, and they prefer very high security over much higher return on their own investments.
So basically, borrowers who need a lot of money fast are very well served by trust deed investment companies. They are able to temporarily trade off having a low interest rate for being the ones to get the deal, which they hope will make them much more money than the pittance they paid as extra interest! Neither are these loans unethical, in that they lock in people desperate for cash to overblown interest rates – they are simply fulfilling a need in the market, and serving both parties.
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