Investing In Private Mortgage Notes vs. Investing In Discounted Mortgages – Part II

In my previous blog, I covered the differences in investing between a private mortgage note and a discounted mortgage.

Although the investor in discounted mortgages can decide not to purchase a particular mortgage because of a poorly written note or deed of trust, the investor will find most opportunities presented to him in this field to have deficiencies in paperwork to one degree or another. The private mortgage note investor controls all the risks associated with a bad or improperly drawn mortgage instrument by having a real estate attorney he knows and trusts prepare and exam all documentation required to perfect his lien holder interest.

Return or yield on both vehicles should be about equal on average. The yield on private mortgage loan investments will be the actual interest rate on the note while the yield on discounted mortgages will usually encompass a lower interest rate offset by a discount in purchase price from note amount. Since the market controls return on investment, and since both these investments are considered mortgage investments, the yields should be similar. Often the private mortgage note will yield more with the difference being made up by the discounted mortgage’s bonus if it is paid off early.

However in an efficient market this should be accounted for in the amount of the discount.

Since the range of return is wider in discounted mortgages than in private mortgage note investments, it may be possible for some investors to select the higher return discounted mortgages and thereby enjoy a greater return than the private mortgage investor. Utilizing the various yield enhancing techniques can further any advantage in total return enjoyed by the discounted mortgage investor. However, it has been this author’s experience in purchasing mortgages at discount that it is rare indeed to find a mortgage discounted to such an extent that a significant differential in return can be detected by the discounted mortgage vs. the private mortgage note.

Both private mortgage note investing and investing in discounted mortgages can be time consuming if the investor goes the solo route and much less time consuming if the services of a mortgage broker are used. Since the note and deed of trust used by the private mortgage lender will be boilerplate, i.e., drawn up by an attorney representing his interest and basically the same for all transactions, less time will be spent vs. the discounted mortgage investor who must examine every document relating to each mortgage investment to determine quality and safety of the documentation and how it will relate to any price offered.

Knowledge required for successful investment in either discounted mortgages or private mortgage notes would be essentially the same with much dependent on whether the individual investor utilizes the services of a mortgage broker to facilitate the investment opportunity. However, it is in the area of availability that investing in private mortgage notes have a large advantage over investing in discounted mortgage. While the demand for private mortgage money remains high and investment opportunities abound, access to discounted mortgages by the individual investor has been greatly lessened in the last five years. Large investment concerns have pooled capital and now buy the vast majority of discounted mortgage notes that come on the market. These note buyers have set up, support, and in many cases finance note brokers who now have a vested interest in selling these discounted mortgages to the investment concerns. The investment concerns do not offer the notes to the individual investor, they hold them for the high yield and return on investment. Lessening still the individual investors ability to purchase these discounted mortgages, legal case law has been established that holds the note broker liable in many cases for losses suffered by the individual investor purchasing notes from the broker. As a result the vast majority of note brokers refuse to sell discounted mortgages to the general public, preferring instead to act as buying agencies for the larger investment companies.