How to get higher returns with secured loans

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Abe
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How to get higher returns with secured loans

Post by Abe »

On "The end of LendingClub" thread I posted the following: You can get 15% to 24% return and higher on 1st position loans backed by real estate if you know how to do it. On unsecured loans you can get a lot higher return than that.

willthrill81 asked me to start a new thread discussing specifics on how to do this.

One way to do this is to buy owner financed mortgages at discount. There are several variations of this but I'll just use a simple straight forward example:
John seller sells his house and owner finances the sale as follows:
$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly. After 5 years John seller needs a lump sum of cash, so he sells his mortgage to Joe investor. At the time Joe investor buys the mortgage, the loan balance is $40,658, and there are 120 payments remaining on the loan. Joe investor offers John seller $30k for his mortgage and John seller accepts the offer. Now Joe investor has a 1st mortgage loan on a $50k house and his investment is $30k which is a 60% investment to value ratio. Joe investors yield on his $30k investment is about 18%.
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Stinky
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Re: How to get higher returns with secured loans

Post by Stinky »

Abe wrote: Tue Dec 29, 2020 1:15 pm On "The end of LendingClub" thread I posted the following: You can get 15% to 24% return and higher on 1st position loans backed by real estate if you know how to do it. On unsecured loans you can get a lot higher return than that.

willthrill81 asked me to start a new thread discussing specifics on how to do this.

One way to do this is to buy owner financed mortgages at discount. There are several variations of this but I'll just use a simple straight forward example:
John seller sells his house and owner finances the sale as follows:
$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly. After 5 years John seller needs a lump sum of cash, so he sells his mortgage to Joe investor. At the time Joe investor buys the mortgage, the loan balance is $40,658, and there are 120 payments remaining on the loan. Joe investor offers John seller $30k for his mortgage and John seller accepts the offer. Now Joe investor has a 1st mortgage loan on a $50k house and his investment is $30k which is a 60% investment to value ratio. Joe investors yield on his $30k investment is about 18%.
Are you doing that yourself?

If so, how are you sourcing the loans? And what kind of due diligence are you doing?
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Re: How to get higher returns with secured loans

Post by Abe »

Stinky wrote: Tue Dec 29, 2020 1:40 pm
Abe wrote: Tue Dec 29, 2020 1:15 pm On "The end of LendingClub" thread I posted the following: You can get 15% to 24% return and higher on 1st position loans backed by real estate if you know how to do it. On unsecured loans you can get a lot higher return than that.

willthrill81 asked me to start a new thread discussing specifics on how to do this.

One way to do this is to buy owner financed mortgages at discount. There are several variations of this but I'll just use a simple straight forward example:
John seller sells his house and owner finances the sale as follows:
$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly. After 5 years John seller needs a lump sum of cash, so he sells his mortgage to Joe investor. At the time Joe investor buys the mortgage, the loan balance is $40,658, and there are 120 payments remaining on the loan. Joe investor offers John seller $30k for his mortgage and John seller accepts the offer. Now Joe investor has a 1st mortgage loan on a $50k house and his investment is $30k which is a 60% investment to value ratio. Joe investors yield on his $30k investment is about 18%.
Are you doing that yourself?

If so, how are you sourcing the loans? And what kind of due diligence are you doing?

I've been doing this, or variations of it, for over 35 years. I use my own money to buy mortgages. I have never lost any money doing this although I've come close a few times. In the example above, my investment to value would be 60%, so even if I had to foreclose (worst case), I probably wouldn't lose any money. Most of the time it never gets that far. What typically happens is the buyer has a run of bad luck like losing his job and gets behind on his payments. I usually can work something out with them where they can keep the house and it's still good for me.
Slow and steady wins the race.
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Re: How to get higher returns with secured loans

Post by willthrill81 »

Thanks for starting this thread.

I too am wondering how you source such loans.
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Re: How to get higher returns with secured loans

Post by HenryG »

Abe wrote: Tue Dec 29, 2020 1:56 pm
Stinky wrote: Tue Dec 29, 2020 1:40 pm
Abe wrote: Tue Dec 29, 2020 1:15 pm On "The end of LendingClub" thread I posted the following: You can get 15% to 24% return and higher on 1st position loans backed by real estate if you know how to do it. On unsecured loans you can get a lot higher return than that.

willthrill81 asked me to start a new thread discussing specifics on how to do this.

One way to do this is to buy owner financed mortgages at discount. There are several variations of this but I'll just use a simple straight forward example:
John seller sells his house and owner finances the sale as follows:
$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly. After 5 years John seller needs a lump sum of cash, so he sells his mortgage to Joe investor. At the time Joe investor buys the mortgage, the loan balance is $40,658, and there are 120 payments remaining on the loan. Joe investor offers John seller $30k for his mortgage and John seller accepts the offer. Now Joe investor has a 1st mortgage loan on a $50k house and his investment is $30k which is a 60% investment to value ratio. Joe investors yield on his $30k investment is about 18%.
Are you doing that yourself?

If so, how are you sourcing the loans? And what kind of due diligence are you doing?

I've been doing this, or variations of it, for over 35 years. I use my own money to buy mortgages. I have never lost any money doing this although I've come close a few times. In the example above, my investment to value would be 60%, so even if I had to foreclose (worst case), I probably wouldn't lose any money. Most of the time it never gets that far. What typically happens is the buyer has a run of bad luck like losing his job and gets behind on his payments. I usually can work something out with them where they can keep the house and it's still good for me.
So in the example, you are playing the role of Joe investor for over 35 years. How do you find the John seller(s)? Do you have some sort of inside connection to these opportunities, or do you think this is generally replicable?
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Re: How to get higher returns with secured loans

Post by Abe »

willthrill81 wrote: Tue Dec 29, 2020 4:13 pm Thanks for starting this thread.

I too am wondering how you source such loans.
I use my own money.
Slow and steady wins the race.
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Re: How to get higher returns with secured loans

Post by willthrill81 »

Abe wrote: Tue Dec 29, 2020 5:04 pm
willthrill81 wrote: Tue Dec 29, 2020 4:13 pm Thanks for starting this thread.

I too am wondering how you source such loans.
I use my own money.
That's not my question. In your example, how do you find 'John seller', who owns a mortgage that he is willing to sell?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: How to get higher returns with secured loans

Post by BolderBoy »

Abe wrote: Tue Dec 29, 2020 1:15 pm$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly.
Can you explain how the 10% interest comes into play? Is that the interest rate on the loan? Who or why would anyone pay such?
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Re: How to get higher returns with secured loans

Post by Abe »

HenryG wrote: Tue Dec 29, 2020 4:28 pm

So in the example, you are playing the role of Joe investor for over 35 years. How do you find the John seller(s)? Do you have some sort of inside connection to these opportunities, or do you think this is generally replicable?
I would say it would be classified as a niche investment that requires a certain amount of specialized knowledge, but I don't see why it couldn't be replicated. As for finding them, I run ads in local shoppers saying something like this: Are you collecting payments on property you've sold? I will pay you cash for your mortgage/land contract. Call (my phone number). After you've been doing this for a while, people will call you wanting to sell their mortgage. It may be a real estate agent or maybe a banker who has a client who wants to sell their mortgage. You would be suprised at how many owner financed mortgages there are out there.
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Re: How to get higher returns with secured loans

Post by Abe »

willthrill81 wrote: Tue Dec 29, 2020 5:09 pm
Abe wrote: Tue Dec 29, 2020 5:04 pm
willthrill81 wrote: Tue Dec 29, 2020 4:13 pm Thanks for starting this thread.

I too am wondering how you source such loans.
I use my own money.
That's not my question. In your example, how do you find 'John seller', who owns a mortgage that he is willing to sell?
I run ads in local shoppers saying something like this: Are you collecting payments on property you've sold? I will pay you cash for your mortgage/land contract. Call (my phone number). After you've been doing this for a while, people will call you wanting to sell their mortgage. It may be a real estate agent or maybe a banker who has a client who wants to sell their mortgage.
Slow and steady wins the race.
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Re: How to get higher returns with secured loans

Post by rich126 »

I would assume most of these would be older mortgages since the housing market is strong in most areas and there is no need for a seller to finance the sale of their own home. Due to the number of buyers out there, they would already have financing or be paying cash.

Generally a seller would only finance a sale in a bad market and/or when a home doesn't appraise for the selling value and a lender won't give the buyer sufficient money.

Or am I totally wrong on that?
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Re: how to get

Post by crswvc »

Sounds like a business of factoring aka buying a cash stream at a discount.
Not a passive investment.
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Re: How to get higher returns with secured loans

Post by willthrill81 »

Abe wrote: Tue Dec 29, 2020 5:23 pm
willthrill81 wrote: Tue Dec 29, 2020 5:09 pm
Abe wrote: Tue Dec 29, 2020 5:04 pm
willthrill81 wrote: Tue Dec 29, 2020 4:13 pm Thanks for starting this thread.

I too am wondering how you source such loans.
I use my own money.
That's not my question. In your example, how do you find 'John seller', who owns a mortgage that he is willing to sell?
I run ads in local shoppers saying something like this: Are you collecting payments on property you've sold? I will pay you cash for your mortgage/land contract. Call (my phone number). After you've been doing this for a while, people will call you wanting to sell their mortgage. It may be a real estate agent or maybe a banker who has a client who wants to sell their mortgage.
Gotcha. Thanks.
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Re: How to get higher returns with secured loans

Post by rossington »

BolderBoy wrote: Tue Dec 29, 2020 5:18 pm
Abe wrote: Tue Dec 29, 2020 1:15 pm$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly.
Can you explain how the 10% interest comes into play? Is that the interest rate on the loan? Who or why would anyone pay such?
That's my question too.
Interesting strategy though.
I would add that over a 10 year period putting the money in a TSM index fund would get you 15-24% a lot more quickly with much less work.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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Re: How to get higher returns with secured loans

Post by willthrill81 »

rossington wrote: Tue Dec 29, 2020 5:48 pm
BolderBoy wrote: Tue Dec 29, 2020 5:18 pm
Abe wrote: Tue Dec 29, 2020 1:15 pm$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly.
Can you explain how the 10% interest comes into play? Is that the interest rate on the loan? Who or why would anyone pay such?
That's my question too.
Interesting strategy though.
I would add that over a 10 year period putting the money in a TSM index fund would get you 15-24% a lot more quickly with much less work.
Historically, stocks haven't returned even close to that amount over the long-term, closer to 10% nominal.

I'm guessing that the 10% interest rate was mostly for illustrative purposes, but it's possible that an owner financed mortgage could have that high of a rate, especially for a relatively small mortgage and if the borrower's credit wasn't great.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: How to get higher returns with secured loans

Post by rossington »

willthrill81 wrote: Tue Dec 29, 2020 6:02 pm
rossington wrote: Tue Dec 29, 2020 5:48 pm
BolderBoy wrote: Tue Dec 29, 2020 5:18 pm
Abe wrote: Tue Dec 29, 2020 1:15 pm$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly.
Can you explain how the 10% interest comes into play? Is that the interest rate on the loan? Who or why would anyone pay such?
That's my question too.
Interesting strategy though.
I would add that over a 10 year period putting the money in a TSM index fund would get you 15-24% a lot more quickly with much less work.
Historically, stocks haven't returned even close to that amount over the long-term, closer to 10% nominal.

I'm guessing that the 10% interest rate was mostly for illustrative purposes, but it's possible that an owner financed mortgage could have that high of a rate, especially for a relatively small mortgage and if the borrower's credit wasn't great.
Maybe I should have said "within" a 10 year period. For example from 3/23 to 12/17/20 VTSAX increased 73.28% ...9 months.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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Re: How to get higher returns with secured loans

Post by Abe »

willthrill81 wrote: Tue Dec 29, 2020 6:02 pm
rossington wrote: Tue Dec 29, 2020 5:48 pm
BolderBoy wrote: Tue Dec 29, 2020 5:18 pm
Abe wrote: Tue Dec 29, 2020 1:15 pm$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly.
Can you explain how the 10% interest comes into play? Is that the interest rate on the loan? Who or why would anyone pay such?
That's my question too.
Interesting strategy though.
I would add that over a 10 year period putting the money in a TSM index fund would get you 15-24% a lot more quickly with much less work.
Historically, stocks haven't returned even close to that amount over the long-term, closer to 10% nominal.

I'm guessing that the 10% interest rate was mostly for illustrative purposes, but it's possible that an owner financed mortgage could have that high of a rate, especially for a relatively small mortgage and if the borrower's credit wasn't great.

Thanks willthrill81 for posting. Many times these loans are owner financed because the property or the borrower do not always meet the banks qualifications, and that is why the interest rates on these loans tend to be higher than conventional bank loans. They are not in competition with the banks.
In regard to investing in the TSM index fund, I am fully invested in the TSM index fund. I'm not saying that investing in mortgages is better than investing in the total stock market index fund. It may not be, but I don't want to invest anymore in the stock market, and I don't want to invest anymore in rent houses, so buying mortgages is just another option. I'm not trying to talk anyone into doing anything. I don't really care if some Bogleheads don't agree with me. I only started this post because willthrill81 asked me to. I will say this, buying mortgages has been good to me.
Slow and steady wins the race.
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Re: How to get higher returns with secured loans

Post by coffeeblack »

Abe wrote: Tue Dec 29, 2020 5:23 pm
willthrill81 wrote: Tue Dec 29, 2020 5:09 pm
Abe wrote: Tue Dec 29, 2020 5:04 pm
willthrill81 wrote: Tue Dec 29, 2020 4:13 pm Thanks for starting this thread.

I too am wondering how you source such loans.
I use my own money.
That's not my question. In your example, how do you find 'John seller', who owns a mortgage that he is willing to sell?
I run ads in local shoppers saying something like this: Are you collecting payments on property you've sold? I will pay you cash for your mortgage/land contract. Call (my phone number). After you've been doing this for a while, people will call you wanting to sell their mortgage. It may be a real estate agent or maybe a banker who has a client who wants to sell their mortgage.
How do you make sure the mortgage is a good mortgage and the seller isn't trying to get rid of it because the buyer is having financial issues?

How do you know how much to give them to purchase their mortgage? Is there a percentage or a formula?
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Re: How to get higher returns with secured loans

Post by zie »

What sort of paperwork do you do? I imagine the biggest is getting the mortgage loan recorded with the county?

I imagine it's just a signed contract, then pay 'john seller their 30k(from 1st example)', then record with the county on the property in question?
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Re: How to get higher returns with secured loans

Post by willthrill81 »

Abe wrote: Tue Dec 29, 2020 6:37 pm
willthrill81 wrote: Tue Dec 29, 2020 6:02 pm
rossington wrote: Tue Dec 29, 2020 5:48 pm
BolderBoy wrote: Tue Dec 29, 2020 5:18 pm
Abe wrote: Tue Dec 29, 2020 1:15 pm$50k sale price, 10% interest, 180 payments (15 yr loan), payment $537.30 monthly.
Can you explain how the 10% interest comes into play? Is that the interest rate on the loan? Who or why would anyone pay such?
That's my question too.
Interesting strategy though.
I would add that over a 10 year period putting the money in a TSM index fund would get you 15-24% a lot more quickly with much less work.
Historically, stocks haven't returned even close to that amount over the long-term, closer to 10% nominal.

I'm guessing that the 10% interest rate was mostly for illustrative purposes, but it's possible that an owner financed mortgage could have that high of a rate, especially for a relatively small mortgage and if the borrower's credit wasn't great.

Thanks willthrill81 for posting. Many times these loans are owner financed because the property or the borrower do not always meet the banks qualifications, and that is why the interest rates on these loans tend to be higher than conventional bank loans. They are not in competition with the banks.
In regard to investing in the TSM index fund, I am fully invested in the TSM index fund. I'm not saying that investing in mortgages is better than investing in the total stock market index fund. It may not be, but I don't want to invest anymore in the stock market, and I don't want to invest anymore in rent houses, so buying mortgages is just another option. I'm not trying to talk anyone into doing anything. I don't really care if some Bogleheads don't agree with me. I only started this post because willthrill81 asked me to. I will say this, buying mortgages has been good to me.
Again, thank you for your information. I really appreciate it.

It seems that this is a potentially very good strategy for those (1) with significant taxable assets, (2) want diversification from stocks, and (3) who are willing to put in the needed time and legwork to make it happen.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: How to get higher returns with secured loans

Post by simplesimon »

Nice, I had read something similar to this in the WSJ taken to an institutional level (buying defaulted mortgages from banks).

How many of these do you have at any given time? What’s your average note amount? Is this a full time job for you?
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Re: How to get higher returns with secured loans

Post by Abe »

coffeeblack wrote: Tue Dec 29, 2020 6:42 pm
Abe wrote: Tue Dec 29, 2020 5:23 pm
willthrill81 wrote: Tue Dec 29, 2020 5:09 pm
Abe wrote: Tue Dec 29, 2020 5:04 pm
willthrill81 wrote: Tue Dec 29, 2020 4:13 pm Thanks for starting this thread.

I too am wondering how you source such loans.
I use my own money.
That's not my question. In your example, how do you find 'John seller', who owns a mortgage that he is willing to sell?

I run ads in local shoppers saying something like this: Are you collecting payments on property you've sold? I will pay you cash for your mortgage/land contract. Call (my phone number). After you've been doing this for a while, people will call you wanting to sell their mortgage. It may be a real estate agent or maybe a banker who has a client who wants to sell their mortgage.
How do you make sure the mortgage is a good mortgage and the seller isn't trying to get rid of it because the buyer is having financial issues?

How do you know how much to give them to purchase their mortgage? Is there a percentage or a formula?
A long time age, the person who taught my how to do this told me not to pay any more for a mortgage than the amount I would be happy to own the property for. That right there eliminates a lot of risk. You have to read all the paperwork, and look at the payment record. Sometimes the buyer is a little behind, but I only pay for the payments remaining on the loan. You use a financial calculator to determine how much you offer.
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Re: How to get higher returns with secured loans

Post by Meaty »

zie wrote: Tue Dec 29, 2020 6:44 pm What sort of paperwork do you do? I imagine the biggest is getting the mortgage loan recorded with the county?

I imagine it's just a signed contract, then pay 'john seller their 30k(from 1st example)', then record with the county on the property in question?
+1
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Re: How to get higher returns with secured loans

Post by Abe »

Meaty wrote: Tue Dec 29, 2020 7:13 pm
zie wrote: Tue Dec 29, 2020 6:44 pm What sort of paperwork do you do? I imagine the biggest is getting the mortgage loan recorded with the county?

I imagine it's just a signed contract, then pay 'john seller their 30k(from 1st example)', then record with the county on the property in question?
+1
Once the seller agrees to my offer, I usually order a mortgagee title insurance policy just to be sure there are no other mortgages on the property, etc, and I get an assignment and have it recorded. The assignment transfers the mortgage to me. I then send a letter to the buyer telling them the mortgage has been assigned to me, and I give them my mailing address so they can send payments to me. Once you get it set up, it's just a matter of taking the checks to the bank every month. I like that part. :happy
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Re: How to get higher returns with secured loans

Post by Meaty »

Abe wrote: Tue Dec 29, 2020 7:22 pm
Meaty wrote: Tue Dec 29, 2020 7:13 pm
zie wrote: Tue Dec 29, 2020 6:44 pm What sort of paperwork do you do? I imagine the biggest is getting the mortgage loan recorded with the county?

I imagine it's just a signed contract, then pay 'john seller their 30k(from 1st example)', then record with the county on the property in question?
+1
Once the seller agrees to my offer, I usually order a mortgagee title insurance policy just to be sure there are no other mortgages on the property, etc, and I get an assignment and have it recorded. The assignment transfers the mortgage to me. I then send a letter to the buyer telling them the mortgage has been assigned to me, and I give them my mailing address so they can send payments to me. Once you get it set up, it's just a matter of taking the checks to the bank every month. I like that part. :happy
Do you use a real estate attorney to do any of this paperwork for you?
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Re: How to get higher returns with secured loans

Post by Abe »

Meaty wrote: Tue Dec 29, 2020 7:54 pm Do you use a real estate attorney to do any of this paperwork for you?
If it's a land contract, I have the seller deed the property to me and assign the contract to me. If it's a mortgage or a deed of trust there will be a promissory note with it. I have the seller assign the mortgage or deed of trust to me and then they endorse (sign) the note on back just like you would endorse a check. I usually get a mortgagee title insurance policy from a title company. I send a letter to the buyer and have them sign a form verifying that the information is correct like how many payments remaining on the loan, etc. I have the documents recorded at the county recorders office where the property is located. I typically do all this myself including drawing up the documents and don't use an attorney.
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Re: How to get higher returns with secured loans

Post by Abe »

simplesimon wrote: Tue Dec 29, 2020 7:05 pm Nice, I had read something similar to this in the WSJ taken to an institutional level (buying defaulted mortgages from banks).

Is this a full time job for you?
There are people who buy packages of non-performing loans from banks. Banks consider loans that are 90 days past due to be non-performing and they like to get these loans off their books. These loans are deeply discounted. The buyers of these loans will buy them in wholesale lots and then resell (retail) them to investors or they may restructure the loans and get them back current again. Some people will buy individual mortgages and resell them to investors making a few thousand on a deal. I don't do any of this. I just buy them using my own money and hold them until the loans are paid off. A lot of people who do this are people who own rental properties and have some knowledge of how the real estate business works. That was kind of how I got started doing this. Owning rentals requires a certain amount of management. Owning a mortgage on a property does not require so much management. Once the initial set up is done it's just a matter of collecting the payments every month. Most of these owner financed mortgages that can be bought at discount will not be mortgages on houses in upscale neighborhoods. They are typically mortgages on older houses in older neighborhoods where working class people live. There are a lot of good people out there who don't make a lot of money, but they get up and go to work everyday, and they need a roof over their head.
I said up thread that there are a lot of variations to this. An example would be to buy a house and then resell it with owner financing. I bought a house where I live, a Farmers Home foreclosure, on the court house steps for $16k. I sold the house for $35k at 10% interest, 10 years (120 months) and payments of $462.53. So, I essentially bought a 120 month income stream of $462.53 monthly, and my investment was $16k giving me a 33% yield. This works real well with used mobile homes.
Once you learn the basic concept of doing this, you begin to see opportunities that you didn't see before. I have even bought furniture paper, but I doubt most Bogleheads would have any interest in that.

As far as being a full time job, no it is not. It's a lot less time and energy than owning rental properties.
Last edited by Abe on Wed Dec 30, 2020 3:21 pm, edited 1 time in total.
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Re: How to get higher returns with secured loans

Post by Abe »

simplesimon wrote: Tue Dec 29, 2020 7:05 pm Nice, I had read something similar to this in the WSJ taken to an institutional level (buying defaulted mortgages from banks).

How many of these do you have at any given time? What’s your average note amount? Is this a full time job for you?

There are people who buy packages of non-performing loans from banks. Banks consider loans that are 90 days past due to be non-performing and they like to get these loans off their books. These loans are deeply discounted. The buyers of these loans will buy them in wholesale lots and then resell (retail) them to investors or they may restructure the loans and get them back current again. Some people will buy individual mortgages and resell them to investors making a few thousand on a deal. I don't do any of this. I just buy them using my own money and hold them until the loans are paid off. A lot of people who do this are people who own rental properties and have some knowledge of how the real estate business works. That was kind of how I got started doing this. Owning rentals requires a certain amount of management. Owning a mortgage on a property does not require so much management. Once the initial set up is done it's just a matter of collecting the payments every month. Most of these owner financed mortgages that can be bought at discount will not be mortgages on houses in upscale neighborhoods. They are typically mortgages on older houses in older neighborhoods where working class people live. There are a lot of good people out there who don't make a lot of money, but they get up and go to work everyday, and they need a roof over their head.
I said up thread that there are a lot of variations to this. An example would be to buy a house and then resell it with owner financing. I bought a house where I live, a Farmers Home foreclosure, on the court house steps for $16k. I sold the house (owner financing) for $35k at 10% interest, 10 years (120 months) and payments of $462.53. So, I essentially bought a $462.53 per month ten year income stream, and my investment was $16k giving me a 33% yield. This works real well with used mobile homes.
Once you learn the basic concept of doing this, you begin to see opportunities that you didn't see before. I have even bought furniture paper, but I doubt most Bogleheads would have any interest in that.

I know a lot of Bogleheads limit themselves to passive only investments. I like to keep an open mind, but to each his own.

If you are interested in this type of thing you can watch a short video here
https://www.youtube.com/watch?v=UN2LfHWuht0

The Paper Source website has a 8 lesson E-Course which is free. I haven't taken the course but I'm sure it has a lot of information if you are interested. Disclaimer: The Paper Source is in the business of selling stuff, but they say the E-Course is free. Here is a link to it.
https://papersourceonline.com/free-e-course-2/
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Re: How to get higher returns with secured loans

Post by simplesimon »

Appreciate your time explaining all this Abe. I had the same thought about preferring to be a financier than a landlord. I’m not sure the same opportunities exist for that little amount of capital where I live. Do you do work out of state? Is everything within driving distance for you?

How often have you had to foreclose on someone?

Bank financing is getting ridiculously cheap these days, are you still seeing the same opportunities today vs a decade ago?
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Re: How to get higher returns with secured loans

Post by surfstar »

Assumptions:

1. This is mid-west or a VLCOL area
2. Much harder to replicate with today's interest rates

"15-24% return" oh "and higher" was mentioned in the OP.

I just don't see this being a strategy for going forward, unless it is quite risky.


I can tell you guys how I made money flipping VW TDIs one year - it also is no longer able to be replicated.

I apologize, as some may call it thread-crapping, but I call it a reality check.
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Re: How to get higher returns with secured loans

Post by Abe »

simplesimon wrote: Wed Dec 30, 2020 1:13 pm Appreciate your time explaining all this Abe. I had the same thought about preferring to be a financier than a landlord. I’m not sure the same opportunities exist for that little amount of capital where I live. Do you do work out of state? Is everything within driving distance for you?

How often have you had to foreclose on someone?

Bank financing is getting ridiculously cheap these days, are you still seeing the same opportunities today vs a decade ago?
I have answered some of your questions upthread. I live in an economically depressed area so this might not work as well in a more prosperous area. All the mortgages I have bought are within a 100 radius of where I live.

I very seldom have had to foreclose. Most of the time the buyer may have had a run of bad luck and gets behind on his payments. I can usually work something out with him (restructure the note) that works for the buyer and for me. The few times I have had to foreclose, I come out in a better position than I was before the foreclosure.

Most owner financed mortgages that can be bought at discount will NOT be mortgages on houses in upscale neighborhoods. They are typically mortgages on older houses in older neighborhoods where working class people live. Many times the banks won't make loans on these properties because the property or the buyer do not meet their requirements, so there is a niche there.
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Re: How to get higher returns with secured loans

Post by coffeeblack »

Abe wrote: Tue Dec 29, 2020 7:11 pm
coffeeblack wrote: Tue Dec 29, 2020 6:42 pm
Abe wrote: Tue Dec 29, 2020 5:23 pm
willthrill81 wrote: Tue Dec 29, 2020 5:09 pm
Abe wrote: Tue Dec 29, 2020 5:04 pm
I use my own money.
That's not my question. In your example, how do you find 'John seller', who owns a mortgage that he is willing to sell?

I run ads in local shoppers saying something like this: Are you collecting payments on property you've sold? I will pay you cash for your mortgage/land contract. Call (my phone number). After you've been doing this for a while, people will call you wanting to sell their mortgage. It may be a real estate agent or maybe a banker who has a client who wants to sell their mortgage.
How do you make sure the mortgage is a good mortgage and the seller isn't trying to get rid of it because the buyer is having financial issues?

How do you know how much to give them to purchase their mortgage? Is there a percentage or a formula?
A long time age, the person who taught my how to do this told me not to pay any more for a mortgage than the amount I would be happy to own the property for. That right there eliminates a lot of risk. You have to read all the paperwork, and look at the payment record. Sometimes the buyer is a little behind, but I only pay for the payments remaining on the loan. You use a financial calculator to determine how much you offer.
Vague answer, but ok.
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Re: How to get higher returns with secured loans

Post by Abe »

surfstar wrote: Wed Dec 30, 2020 1:31 pm Assumptions:

1. This is mid-west or a VLCOL area
2. Much harder to replicate with today's interest rates

"15-24% return" oh "and higher" was mentioned in the OP.

I just don't see this being a strategy for going forward, unless it is quite risky.


I can tell you guys how I made money flipping VW TDIs one year - it also is no longer able to be replicated.

I apologize, as some may call it thread-crapping, but I call it a reality check.
You don't have to apologize. I started this post because another poster asked me to. I said earlier that I'm not trying to convince anyone to do anything. To each his own. As far as risk is concerned, I've been doing this for over 35 years and I can honestly say that I have never lost any money doing this. Some posters asked me questions and I tried to answer their questions the best I could. It doesn't make any difference to me whether you agree with me or not. It's a free country. You do your thing; I'll do mine.
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Re: How to get higher returns with secured loans

Post by surfstar »

Abe wrote: Wed Dec 30, 2020 1:50 pm
surfstar wrote: Wed Dec 30, 2020 1:31 pm Assumptions:

1. This is mid-west or a VLCOL area
2. Much harder to replicate with today's interest rates

"15-24% return" oh "and higher" was mentioned in the OP.

I just don't see this being a strategy for going forward, unless it is quite risky.


I can tell you guys how I made money flipping VW TDIs one year - it also is no longer able to be replicated.

I apologize, as some may call it thread-crapping, but I call it a reality check.
You don't have to apologize. I started this post because another poster asked me to. I said earlier that I'm not trying to convince anyone to do anything. To each his own. As far as risk is concerned, I've been doing this for over 35 years and I can honestly say that I have never lost any money doing this. Some posters asked me questions and I tried to answer their questions the best I could. It doesn't make any difference to me whether you agree with me or not. It's a free country. You do your thing; I'll do mine.
Agreed - while I'm not interested in pursuing this, I do appreciate your thread/info that you are sharing. I'd not heard of or considered something like this previously.
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Re: How to get higher returns with secured loans

Post by Abe »

coffeeblack wrote: Wed Dec 30, 2020 1:42 pm
Abe wrote: Tue Dec 29, 2020 7:11 pm
coffeeblack wrote: Tue Dec 29, 2020 6:42 pm
Abe wrote: Tue Dec 29, 2020 5:23 pm
willthrill81 wrote: Tue Dec 29, 2020 5:09 pm

That's not my question. In your example, how do you find 'John seller', who owns a mortgage that he is willing to sell?

I run ads in local shoppers saying something like this: Are you collecting payments on property you've sold? I will pay you cash for your mortgage/land contract. Call (my phone number). After you've been doing this for a while, people will call you wanting to sell their mortgage. It may be a real estate agent or maybe a banker who has a client who wants to sell their mortgage.
How do you make sure the mortgage is a good mortgage and the seller isn't trying to get rid of it because the buyer is having financial issues?

How do you know how much to give them to purchase their mortgage? Is there a percentage or a formula?
A long time age, the person who taught my how to do this told me not to pay any more for a mortgage than the amount I would be happy to own the property for. That right there eliminates a lot of risk. You have to read all the paperwork, and look at the payment record. Sometimes the buyer is a little behind, but I only pay for the payments remaining on the loan. You use a financial calculator to determine how much you offer.
Vague answer, but ok.

How is it vague? I've spent a lot of time here answering questions. I can't go in to every little detail on how this is done. I said don't pay more for a mortgage than you would be happy to own the property for. That means that if I had to take the property back (foreclosure), I would be happy to own the house for the amount I paid of the mortgage, so that eliminates a lot of risk. You have to do due diligence. You need to read all the paperwork and check the payment record and verify with the buyer that everything is represented accurately by the seller.

ETA The Paper Source website has a free E-Course that may answer some of your questions.
https://papersourceonline.com/free-e-course-2/

There is information here that may answer some of your questions.
https://papersourceuniversity.com/the-3 ... nk-realty/
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Re: How to get higher returns with secured loans

Post by Stinky »

Abe wrote: Wed Dec 30, 2020 1:50 pm I started this post because another poster asked me to. I said earlier that I'm not trying to convince anyone to do anything. To each his own. As far as risk is concerned, I've been doing this for over 35 years and I can honestly say that I have never lost any money doing this. Some posters asked me questions and I tried to answer their questions the best I could. It doesn't make any difference to me whether you agree with me or not. It's a free country. You do your thing; I'll do mine.
Abe,

I really appreciate you sharing so much about what you’re doing and how you do it. It sounds like you’ve got a well thought out strategy that’s working for you.

Definitely not my cup of tea - but more power to you.
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Re: How to get higher returns with secured loans

Post by Abe »

One other thing that I might point out. Some people may think the yields I've quoted on mortgage investing are exaggerated. The are not. You can get those kinds of yields, but I wouldn't compare the yield on a discounted mortgage to the return on say the total market index fund. The reason I say this is because the dividends and capital gains I receive on my total market index fund investment are automatically reinvested whereas the cash flow I receive from my mortgage investments are not automatically reinvested. This makes a big difference in the compounding effect. The same thing goes for rental investment income. My rental income comes in and sits in my bank account for a while. Some of it gets spent and some of it might get reinvested at some point. So, I guess my point is that even though these high yields sound good, they are not necessarily better than some other types of investments that have the benefit of automatic reinvestment.
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Re: How to get higher returns with secured loans

Post by alpha88 »

Thanks for explaining this.
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Re: How to get higher returns with secured loans

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Abe wrote: Wed Dec 30, 2020 5:06 pm One other thing that I might point out. Some people may think the yields I've quoted on mortgage investing are exaggerated. The are not. You can get those kinds of yields, but I wouldn't compare the yield on a discounted mortgage to the return on say the total market index fund. The reason I say this is because the dividends and capital gains I receive on my total market index fund investment are automatically reinvested whereas the cash flow I receive from my mortgage investments are not automatically reinvested. This makes a big difference in the compounding effect. The same thing goes for rental investment income. My rental income comes in and sits in my bank account for a while. Some of it gets spent and some of it might get reinvested at some point. So, I guess my point is that even though these high yields sound good, they are not necessarily better than some other types of investments that have the benefit of automatic reinvestment.
I can definitely see the value in diversifying from the risk of stocks with this approach.
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Re: How to get higher returns with secured loans

Post by ge1 »

Thanks Abe for taking the time and providing all this detail. I can certainly see how this generates an attractive income stream.

In our own experience, we have been very successful in providing short term loans to finance house flips. Attractive interest rate and loan is secured by property. We are on Nr. 17 now and never had any issues.
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Re: How to get higher returns with secured loans

Post by ScubaHogg »

Abe, do you collect and manage escrow for your loans? If not, how do you ensure the owners keep insurance and stay current on property taxes? Thanks
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Re: How to get higher returns with secured loans

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I know several people who do this successfully. They have a very good relationship with the local title company. As Abe said, you' are mostly dealing with properties in depressed areas and some of the people problems that go with them.

It's also known as a "hard money loan". I seem to recall that one of the newer consumer finance protection laws made this a bit more difficult. The details are fuzzy now, but the Title Company was up to speed.

Another factor to consider is the the tax rate on the income. If you're in a high tax bracket, the cost/benefit ratio diminishes quickly.
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Re: How to get higher returns with secured loans

Post by Abe »

ge1 wrote: Thu Dec 31, 2020 9:42 am Thanks Abe for taking the time and providing all this detail. I can certainly see how this generates an attractive income stream.

In our own experience, we have been very successful in providing short term loans to finance house flips. Attractive interest rate and loan is secured by property. We are on Nr. 17 now and never had any issues.
Thanks for posting. Yes, there are people who specialize in these short term bridge loans. I have done a couple myself.
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Re: How to get higher returns with secured loans

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ScubaHogg wrote: Thu Dec 31, 2020 10:26 am Abe, do you collect and manage escrow for your loans? If not, how do you ensure the owners keep insurance and stay current on property taxes? Thanks
There are companies who will service these loans for a fee. I'm just a small time operator, so I just do it myself. When I buy a mortgage or land contract I have the policy owner sign a letter to the insurance company instructing them to show me as the loss payee on the policy. If the insurance is not maintained, the insurance company will notify me. I just check with the county tax collector to see if the taxes are paid.
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Re: How to get higher returns with secured loans

Post by Abe »

Riprap wrote: Thu Dec 31, 2020 10:53 am I know several people who do this successfully. They have a very good relationship with the local title company. As Abe said, you' are mostly dealing with properties in depressed areas and some of the people problems that go with them.

It's also known as a "hard money loan". I seem to recall that one of the newer consumer finance protection laws made this a bit more difficult. The details are fuzzy now, but the Title Company was up to speed.

Another factor to consider is the the tax rate on the income. If you're in a high tax bracket, the cost/benefit ratio diminishes quickly.
Thanks for posting. Buying discounted mortgages is not the same thing as making hard money loans. Someone can correct me if I'm wrong, but I think a hard money loan is when an individual makes a direct loan to someone secured by real estate. In other words they originate the loan. I buy loans that are already originated, so the buyer is only paying the interest rate that they agreed to pay when they signed the promissory note but not more than that. The additional yield is in the discount. The seller of the note is the one taking the discount, not the buyer, so there is no usury. Nothing changes for the buyer except where he sends his payment to. Banks do this all the time.
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Re: How to get higher returns with secured loans

Post by WarAdmiral »

Thanks Abe for starting this topic.

Do you have any experience with
1. Notes Direct. www.notesdirect.com
2. PaperStac. www.paperstac.com ?

Looks like these are online exchanges that make is easier to buy notes.
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Re: How to get higher returns with secured loans

Post by Abe »

WarAdmiral wrote: Thu Dec 31, 2020 1:04 pm Thanks Abe for starting this topic.

Do you have any experience with
1. Notes Direct. www.notesdirect.com
2. PaperStac. www.paperstac.com ?

Looks like these are online exchanges that make is easier to buy notes.
I am familiar with Notes Direct. They teach seminars on how to buy and sell owner financed mortgages, and they also buy and sell owner financed mortgages. I think they buy non-performing notes in lots from banks and then restructure some and sell some.

I am not familiar with PaperStac.

I am also familiar with The Paper Source https://papersourceonline.com/meet-the-founders/
They have a newsletter you can subscribe to, and they teach how to buy notes. They also have a registry of note buyers.

There are people who buy paper and then resale, and some who broker notes, and there are institutional buyers of owner financed notes.

I don't do any of this, I just buy them or create them with my own money and hold them until they pay off.
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Re: How to get higher returns with secured loans

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Abe wrote: Thu Dec 31, 2020 12:09 pm Thanks for posting. Buying discounted mortgages is not the same thing as making hard money loans. Someone can correct me if I'm wrong, but I think a hard money loan is when an individual makes a direct loan to someone secured by real estate. In other words they originate the loan. I buy loans that are already originated, so the buyer is only paying the interest rate that they agreed to pay when they signed the promissory note but not more than that. The additional yield is in the discount. The seller of the note is the one taking the discount, not the buyer, so there is no usury. Nothing changes for the buyer except where he sends his payment to. Banks do this all the time.
I think you're right. These discounted loans however may have originated as a hard money loan.
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Re: How to get higher returns with secured loans

Post by Abe »

Riprap wrote: Thu Dec 31, 2020 3:10 pm
Abe wrote: Thu Dec 31, 2020 12:09 pm Thanks for posting. Buying discounted mortgages is not the same thing as making hard money loans. Someone can correct me if I'm wrong, but I think a hard money loan is when an individual makes a direct loan to someone secured by real estate. In other words they originate the loan. I buy loans that are already originated, so the buyer is only paying the interest rate that they agreed to pay when they signed the promissory note but not more than that. The additional yield is in the discount. The seller of the note is the one taking the discount, not the buyer, so there is no usury. Nothing changes for the buyer except where he sends his payment to. Banks do this all the time.
I think you're right. These discounted loans however may have originated as a hard money loan.
I don't think these loans, at least the ones I buy, originated as hard money loans. A hard money loan would be where an outside investor loans money, typically with high rates and fees and shorter term. With owner financing, the seller, not an outside lender, finances the sale of their own property. That's why they are called seller carry back or owner financed mortgages. A hard money lender probably would not sell their loan at discount because they are investors just like I am.
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Re: How to get higher returns with secured loans

Post by mjb »

Thank you for posting this. There are a few CEFs that buy packaged ones. Higher returns but really high volatility.

Peer street is an option for hard money lending. However I currently have two that are in default and waiting to see how it plays out.
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