BUYING MORTGAGES BRINGS HIGH RETURNS
Joel Cassway

All over the United States, millions of dollars are sitting, half forgotten, in desk drawers and safety deposit boxes. This money is in the form of mortgages (trust deeds) that owners took back in order to sell their properties fast with "creative" financing instead of conventional financing a few years back. These mortgages can translate into extremely high rates of return and cash flow to the investor knowledgeable in "paper."

Show 'em How
Now there are lots of former owners out there who would love to turn their mortgages into cash if only they knew how.
Showing them how creates win/win opportunities for everyone.

The educated investor can buy these mortgages at less than face value, creating rates of return higher than the rate of the original instrument. To smoke out these mortgage holders, you can:

· Advertise in small local papers-the weeklies, shoppers' guides, neighborhood papers- preferably not in the heart of metropolitan areas where this game is played by the most sophisticated investors. The reference desk at your local library has media directories.

· Make phone calls and send letters. Like every other idea, people can't know what you're doing unless you let them know. Put out feelers to everyone, including your barber and the mailman.

· Have little cards made that say, "Investor buys mortgages for cash" and put them up at supermarkets, Laundromats, the local deli, wherever neighborhood people congregate.

· Go to the local courthouse, to whichever department records deeds and mortgages. These are matters of public record and will tell you who took mortgages back. when, on what terms, and the address of the mortgage holder. Then, write or call the holder.

· Get your message out on the Internet by posting to online bulletin boards or by creating your own Web site.

Decide on the Risk
Some of these probes will pan out and you will need to evaluate a potential deal. Since risk is frequently a big factor in obtaining the highest possible yield, you must decide how much risk you want to take. Consider these items:

1. Normally it's better to have a "seasoned" mortgage, one on which payments have been made for some time. Payment history is important: Are payments current, are they usually on time, have there been any problems?

2. It's better to have a mortgage on the mortgagor's own residence than on a business or investment property because the last thing most people want to lose is the house they live in.

3. What is the quality of the property itself'? Is it well maintained?

4. Is there equity in the property? Equity is your protection if you have to foreclose. As a rule of thumb, there should be 20 percent equity in the property; the more the better.

5. What is the mortgagor's credit history on loans other than his mortgage? This information will not always be available to you.

6. Review the mortgage and note. Are they assumable? Is there a penalty for late payment? How long before the loan is considered in default?

7. Run a current title search. 

8. If it's available, review the original agreement of sale and the settlement sheet to make sure the transaction was as represented.

Simple Arithmetic
To keep the arithmetic simple, let's assume that your gold mining technique has flushed out a guy with a brand new mortgage he wants to convert to cash. The note is for $10,000 at 12 percent for ten years. The payment would be $143.47. The property and most of the other items on your checklist seem okay, and you have decided to make an offer that will give you a 24 percent return on your cash outlay.

You offer to buy his $10,000 mortgage for $6,507.18 - the amount you have to discount the $10,000 face value to generate a return of 24 percent. Will every mortgage holder accept your offer? Absolutely not. The person who will accept is the "don't wanter"-somebody who wants a lump sum in cash instead of $143.47 a month. If he doesn't accept your initial offer, you can up the ante; after all, 24 percent is pretty high.

Now you decide whether, based on the mortgage in question, you will accept a lesser return. The return on $7,962.42 will be 18 percent for instance-not too shabby when the money market is earning less than 10 percent.

Making You Rich
Let's get to the bottom line. Why do you want such a high rate of return? Because the impact of higher rates is what makes you rich. This is the compounding factor you first heard about back in grade school. Investing $1,000 per year for 25 years at 12 percent will accrue to $133,333.87. The same $1,000 socked away at 24 percent will add up to $898,091.64 over the same 25 years. Compounding, coupled with high rates of return, generates such large numbers that you can afford to be very selective about what you buy.

You will need a financial calculator to work out the numbers for yourself. Here are the elements:

N- 120, the number of payments on a ten year mortgage, paid monthly.

I - interest of 1 percent per month on a 12 percent mortgage.

PV - $10,000, the present value of the note.

PMT- payment.

For clarity, see the chart below that looks like a financial calculator.

Playing the Game
When you have mastered the basics, you're in a position to work some spectacular deals by restructuring the mortgages you've bought and/or bringing in investor partners seeking higher yields than traditional markets can offer. Obtaining higher yields accelerates the wealth-building process. Another benefit is "instant cash," which can be obtained when you know how to play the paper game.

Dealing with these mortgages can obviously be very profitable. They are also much easier to deal with than real estate: Mortgages don't call you up in the middle of the night because the toilet isn't working. You might consider starting your own mortgage buying program, salting a few of these deals away for your retirement, and restructuring others for current cash flow, while you buy real estate for tax benefits and appreciation. Your real estate will help shelter the high rates you earn on your mortgages.

A Last Word
The documentation and legal work on these mortgage deals isn't particularly complicated, but competent legal and accounting advice is essential before you set up your mortgage buying program.

Joel Cassway is a Certified Financial Planner (inactive), Real estate Broker (inactive) and a Discount Mortgage investor, broker, and teacher (very active) with over 25 years of experience. He is the author of many educational programs regarding discount mortgages, including the very comprehensive and popular SuperEarnings CD (see details). 

If you have any questions about this article or anything related to discount mortgages, you will very likely find the answers you are looking for when you order and listen to the 1 ½ hour SuperEarnings CD.

Figuring the Mortgage Payment

The payment is $143.47

Figuring a 24 percent yield (2 percent/month)

The answer is $6,507.18

Figuring an 18 percent yield (1.5 percent/month)

The answer is $7,962.42

Joel Cassway is a discount mortgage investor, broker, teacher and master marketer with over 30 years of experience. Joel is the author of a series of instructional programs that include workbooks and tapes. His programs entitled, "SUPEREARNINGS", "Power Negotiating," "The Numbers Game," and "The Paper Game," are used by investors all over the country.

He is also the author of the best selling cash flow marketing program "HOW TO TURN 90% OF THE PEOPLE WHO WON'T SELL YOU THEIR NOTES INTO BIG TIME CASH PROFITS".

 



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