Success in the Discounted Mortgage, Note and Cash Flow Business- Part Two

mortgageIn the last post, I listed for you the four important steps to success in the discounted mortgage, note and cash flow business. They are: (1) start part time, (2) think long term, (3) generate leads and (4) flip, do not buy mortgages. I would like to spend some time on the importance of flipping discounted mortgages.

First, you need to understand that there should be three steps in everyone’s financial/business plan:

Step 1-Generate income. In this part of the plan, it is your main goal to increase your income. You need enough money to do all of those things that are necessary and that make life worthwhile. You need enough money to be able to afford a decent house, good and adequate medical care, etc. Once you have taken care of the necessities, then you want to have all of the things that make life fun; nice cars, vacations, the ability to eat at nice restaurants, help your children, parents and/or favorite causes, etc.

Step 2-Invest. After you have accomplished step one, it is important that you put your excess funds to work. In other words, in step one you work for money and in step two money works for you. Because you are reading this, you are already on the right track. The two best ways, in my opinion, to accumulate wealth in this country today is to be in real estate and to have your own business. What could be better then to have real estate or a real estate related business?

Step 3-Plan to retire. We live in the richest country in the world and the vast majority of people in our country cannot afford to retire at age sixty-five. Studies indicate that the average person is ninety days from being homeless if they should lose their job, health or marriage. In other words, most people are living from paycheck to paycheck at a time when there are very few safe jobs. Most people have come to depend on the government, union, company, parents, children, etc. That is a plan that no longer works. There is only one person you can depend on, and that is yourself.

To become financially independent, you must take care of all three steps in the financial plan, and you must do them in order. If you try to skip step one to get directly to step two, your chances of success decline dramatically. This brings us directly to the purpose of this post, which is how to accomplish step 1-generating income. Flipping mortgages is how you generate quick income. This can be done with little risk and/or funds when you know what you are doing.

Definition of a Discounted Mortgage

Before proceeding, let me define for you what a discounted mortgage is by using the following scenario:

Orvel is the owner of an investment property that he sells to Betsy, the buyer. As part of the transaction, Orvel takes back from Betsy a mortgage in the amount of $50,000.00. This means that Orvel now owns a mortgage with the right to collect payments from Betsy. Betsy now owns an investment property, and has an obligation to make payments to Orvel.

For some reason, Orvel decides that he would rather have a lump sum of cash rather then collecting payments. Orvell finds Pete, a buyer for his mortgage, and they agree on a $40,000.00 price. This means that Pete owns the mortgage, Orvel owns cash and Betsy owns property with the obligation to make payments to Pete. A discounted mortgage has just been created. The ingredients are: a transaction between two private parties; the security for the investment is real estate; and the price paid for that investment is less then face. Our transaction has all of the necessary ingredients. Orvell and Betsy are private parties (the lender is not a bank or mortgage company), the investment is secured by Betsy’s property, and the price paid by Pete ($40,000) was less than the face amount of the loan ($50,000).

In the above example, we defined a discounted mortgage. Many questions have been left unanswered. Is this a first or second mortgage, where does the money come from, why would Orvel take such a big discount, what are the risk factors, and so on. These are all legitimate questions which will be answered in future posts.

Next, I will take you through the process of a mortgage flip.

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