How To Make Money Flipping Mortgages by Acting As a Finder

finderIn the last post, I defined a discounted mortgage for you. Let’s briefly review the scenario to refresh your memory. Orvel sells his property to Betsy. Orvel takes back a mortgage for $50,000.00. Orvel then sells his $50,000.00 mortgage to Pete, a third party investor, for $40,000.00. This scenario has all the ingredients of a discounted mortgage; a transaction between private parties, the security for the investment is real estate, and the price paid for the asset is less than face.

Very few discounted mortgage transactions are completed without the help of a facilitator or finder. This is the part you play, and for which you are richly rewarded. Let’s break down your role into its simplest components. Your job is to find someone like Orvel who has something he does not want and put him together with Pete who does want what Orvel has. Using our $50,000.00 example, let’s say that Pete was willing to pay $44,000.00 for Orvel’s loan and that Orvel was willing to take $40,000.00. You do not have to be very good at math to see that your profit in this transaction is $4,000.00. If you analyze what has happened, you can see that you can make a substantial fee without investing or risking your own funds. Pretty good deal. It seems easy, and it is when you know what you are doing.

To make money flipping mortgages, you must have willing buyers with substantial assets. This may be easier then it sounds. There are lots of potential investors today who will stand in line to obtain the substantial rates of return available when investing in discounted mortgages. But there are some land mines of which you must be aware. The most important challenge is to find the right buyers to whom you can flip the mortgages you find. There are basically two types of investors available to you: private and institutional.

When I first started out in this business many years ago, I flipped all of my transactions to private investors. My advice to beginners today is to deal only with institutional buyers for several reasons.

Institutional investors do not run out of money (they have unlimited resources), or care how much profit you make- and they do most of the work. Think about that for a moment – the buyer who puts up the money and takes the risk does most of the work. Sound good? What actually happens, when you think about it, is that you get paid to learn. You learn what you should and should not do, what legal documents you need, what to stay away from, etc. The most important thing you learn from the commercial buyers is how to do the due diligence (more about that shortly).

Working with private buyers is tempting- they are easier to find, do not require a lot of documentation and can work fast. But they are relying on you, and if anything goes wrong with the transaction (even years later), it is you to whom they will look for satisfaction. The result of a transaction involving an inexperienced buyer can be a ruined relationship and a nasty, expensive lawsuit. To eliminate these potential problems, deal only with professional buyers.

Let me run you through the process. Orvel, a mortgage holder, contacts you regarding a $50,000. 00 mortgage he is holding. You get the pertinent details (more about this in a future post) about Orvel’s loan. You contact a commercial/institutional mortgage buyer and relay the information you have gathered. Based on the details of the transaction, the buyer will make you a conditional offer. In this case let’s say the offer is $44,000.00.

You decide that, in this case,  you want to make $4,000.00. That leaves $40,000.00 for Orvel. If Orvel is satisfied with $40,000.00, you are ready to continue the process. Now is the time to collect the transaction documentation from the note seller. Orvel needs to provide you with copies of the mortgage, note, settlement statement, borrowers social security number, etc. This information is forwarded to the buyer who starts the due diligence process.

The first thing the buyer does is check the borrower’s credit. If the credit is good, the process moves forward. If the credit is bad, the transaction is canceled. In any event, I want you to notice that it is the buyer who is not only doing the work, but paying the costs as well. The next step is to have the property appraised. The buyer handles and pays for this service. If the appraisal is good, the transaction moves forward. If the appraisal is bad, the buyer cancels the transaction.

The next big step is for the buyer to make sure there is good title. Once you pass that hurdle, the buyer puts together the necessary closing documentation. I want you to notice that the time and expenses of the transaction are borne by the buyer.

Settlement typically takes place at a local title company. The seller, Orvel, provides the original documents. The buyer provides the money to complete the transaction. Out of that money, your fee (in this case $4,000.00) is paid. This example is called a net transaction. The example is somewhat simplified, but what I described is a fairly accurate description of how the process works. There are many variations and all institutional buyers have different policies.

What I like best about flipping a mortgage in this way (net transaction) is the buyer does most of the work, pays the expenses (whether the transaction closes or not), puts up all of the money and takes all of the risk. Your tasks are to find the transaction, negotiate the price, gather the information and get paid. Sounds like a good deal to me.

In upcoming posts, I will review in more detail what type of mortgages buyers are looking for.

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