Private mortgages aren’t going to be perfect. Note buyers know this and that makes them pretty good at finding creative ways to safely buy mortgage payments.
But there are some notes and land contracts that just don’t make good investments. Save yourself time and marketing dollars by knowing the three notes that investors just aren’t that into.
1. Second Position
Investors want to be first in line to receive payment. When they buy a second lien they are standing in line behind the first mortgage. If payments are missed and there is a foreclosure the investor is going to get what’s left over after covering the first. That’s not much in today’s market of over supply and declining values.
In past years an investor might have made an offer of fifty cents on the dollar for a second note with some decent seasoning, equity, credit, and first to second ratio. Right now, they are just saying, “Pass” and saving their investment dollars for cash flow notes that will keep them secured in first position.
2. No Equity
Property buyers with equity have “skin” in the deal. The greater the equity, the lower the likelihood they will stop making payments.
Equity is the difference between the property value and the amount owed on the private mortgage note. It can come from the down payment, principal pay down, or increasing property values.
When people have little to no equity, they are more likely to default or just walk away from the home. Few note investors want the hassle or risk of taking back a property through foreclosure so are avoiding notes with less than 10% equity.
3. Bad Credit
The private mortgage industry is not immune to the subprime meltdown that led to a tightening of money in the secondary markets. This makes it tough to find note buyers when the payer has a credit score below 625.
If there is enough equity and seasoning, an investor might consider a low Investment to Value (ITV) partial purchase at a higher yield. But if the bad credit mortgage is combined with a new note and no down payment, it is best for note brokers to just move onto the next deal.
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