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