During my approximately 40 years of investing, buying and selling Mortgages, Deeds of Trust, Land Contracts, etc., I have encountered many different and varied situations, problems and surprises.
I have also discovered that when you get one of those surprises, it is almost never good. So, what we need to do is protect ourselves from those surprises as much as we can. I am going to list some questions and answers which, if adhered to, will eliminate some of those unpleasant surprises. To make it a little easier, we will refer to Mortgages, Trust Deeds, Land Contract, Contracts For Sale, etc., as “Mortgages”.
1. Q: What determines if a good investment in a Mortgage?
A: A good investment is when you get your invested capital back plus all the Interest or Yield due on the investment. The following Q’s & A’s will help you to be sure you have a good investment.
2. Q: Is investing in Mortgages a “Safe” investment?
A: There is no such thing as a 100% safe investment. There is always some risk involved. That’s why we have interest. The return of Interest or Yield should be commensurate with the risk, i.e. more risk – more interest. However, if an investor does his due diligence which includes having ample Equity in the property, which secures the mortgage, it is my opinion that this would be a very “safe” investment. If the Mortgage should go into default, the property (upon sale) would return the principal, plus maybe more, to the investor.
3. Q: What are some of the risks, and what can an investor do to minimize the risks?
A: As state previously, any investment entails some risks. However, these risks can be greatly reduced if the investor does his/her due diligence. Some of the things the investor can do include:
(1) Verify the Real Market value of the property that secures the Mortgage. This can be accomplished by the investor obtaining an independent appraisal of the property. The investor or someone he/she trusts should select the appraiser. I recommend that you do not use an appraiser recommended or provided by the borrower.
(2) Be sure you use a professional Escrow Company, Title Company, or in some cases an Attorney to prepare the documents and close the transaction.
(3) Be sure you get Title Insurance. This is referred to as Mortgagee’s Title Insurance which insures the Mortgage you are buying as opposed to Owner’s Title Insurance which insures the property. BE SURE you, as the investor, get Mortgagee’s Title Insurance.
(4) If it is an improved property which secures the Mortgage, be sure you get a Fire (Casualty) Insurance policy insuring the property, naming you as additional insured. If it happens to be land, you won’t need Fire Insurance.
4. Q: How do I protect myself to ensure that I will get my investment back if the borrower doesn’t pay?
A: You have to be sure that there is enough value in the property over and above the amount of the loan (this is called Equity) so that if you have to foreclose and sell the property, you get your investment back plus costs. There is a saying that the 3 most important things to determine the value of a property is Location, Location, Location. Well, when you are investing in a Mortgage, the 3 most important things are Equity, Equity, and Equity!
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.