A real estate note (a mortgage) is where banks invest most of the money they receive in the form of deposits from bank customers. With prices in the housing market remaining low following the Global Financial Crisis and the associated recession, many mortgages are classed as non performing notes (the market value of the property is less than the mortgage value and the borrower is not making the required payments on the mortgage). Banks have many of these types of mortgages on their books and want to sell some of them to reduce their own investment portfolio risk. This situation makes it is possible for investors to participate in similar real estate note investing to that which the banks make and buy mortgage notes at prices that are heavily discounted.
Secured Real Estate Investment
Participating in real estate note investing by purchasing non performing notes through an asset management company provides a great profit opportunity for investors. Asset management companies purchase in large quantities mortgage notes from banks at a value less than the appraised amount and offer these to investors (the bulk purchase enables the notes to be sold using a low cost model). The investments are legally binding contracts that are secured with valuable real estate assets, the associated real estate note is in the name of the investor and they can provide a return on investment in double figures.
Standard Mortgages vs. Real Estate Notes
Real estate note investing (also known as a first trust deed investment) is different to a standard mortgage as three parties are involved rather than two (a lender and a borrower). The three parties are a lender (investor), a borrower and a trustee (the asset management company). The trustee purchases non performing notes from the bank and holds the title of the associated real estate until the mortgage is repaid. In this circumstance the borrower is offered a reduction in the principle amount of the mortgage, with a legal agreement that they will provide the property title if unable to repay the mortgage.
What Happens if the Borrower Defaults on the Mortgage?
If a borrower does not make full payment on non performing notes the mortgage goes into default and the property goes into foreclosure for sale. As part of the agreement it is also possible for the borrower to walk away from their home and property title to avoid foreclosure. A first trust deed investment takes precedence over any other claims on the property and the mortgage title goes to the asset company as per the agreement with the borrower. The asset management company will then arrange a fast sale of the applicable home (typically below market value but well above the amount invested). The lender is then able to keep the profit from the sale once the remaining loan amount has been paid off along with any associated fees.
The overall mortgage note process offers the opportunity for low risk real estate note investing as all finances are secured in a collateralized investment. The asset management company will handle the purchase and the sale of the associated real estate on behalf of the investor with the potential for large returns on their investment in non performing notes.