Three Basic Types of Mortgage REO Notes
There are many types of mortgage notes but I want to summarize them and group them into three important categories in today’s market.
In this Blog I will cover the first type of Notes:
Residential REO Notes:
These are mortgage notes created against single-family homes. The borrowers pay usually on time even though their credit may not be the best. Their payments are almost the same as neighborhood rents for similar homes. Investors buy them usually at approx. 75 cents on the dollar and enjoy a higher cash flow secured against the properties.
I created these notes in mass quantities when I started buying bulk foreclosures at very low prices from banks in early 2009 through early 2012.
- A. I bought the homes,
- B. Fixed them up,
- C. I placed signs with monthly terms of PITI (principal, interest, tax, and insurance) that are very close to the rent prices in each neighborhood.
- D. Then I sold the homes to people that had a good rent payment history even if their credit wasn’t the best.
I carried these mortgage notes at 8% for 30 years. The face amount of the note was approx. $60K but the property cost me on average $20K and I rehabbed it for $15K so my total cost including staff etc. was around $37 or $38K.
- E. Immediately after that I sold the notes at a discount of $40 to $42K and the investors that bought them got a 12% cash flow per year. The yield will end up being even higher when the end buyers will refinance or sell in 5 years or less.
You can create these notes and enjoy the income or you can buy them from bulk REO buyers who sell the homes instead of renting them.
Sincerely,
Cherif Medawar
Comments