Bearishgurl gives some, but not all, of the steps necessary to be sure your TD investment will be safe. All that takes time, which is why the up-front investment involves huge amounts of research, which adds to the “cost” of the investment, which lowers the real rate of return. Since many of the deals you investigate won’t pass the filters you need to apply, that multiplies your research investment costs at the outset.
Yes, some companies are set up to be intermediaries to do all the legwork & present you the investor with a take-it-or-leave-it package, as shown by the link. But think of it–15% to 18% interest rate, plus the sorry borrower pays 6 to 10 points on top of that! Who would do that? The Mafia could offer better terms. The borrower is such a bad risk they apparently can’t borrow from their relatives or a series of credit cards, so be prepared to own the property. Beware of far-away properties, 2d Trust Deeds, inflated appraisals, and the biggie–toxic waste or buried fuel tanks on the property from the 1920s. The property could have negative value.
Rather than the extortionate rates offered by the link, try TheNorrisGroup.com, which sticks to So CA houses, 65% LTV, 12% or so, 3 points to the borrower, and one year term. The borrower is typically a buy, fix up, & sell investor, so you are somewhat safer, LTV-wise. Not endorsing them; do your own due diligence, but it is where I’d put my excess liquidity.
A little history for those under 50 here. TD investments were once really big in the late 70s and 80s when prevailing interest rates were ramping up as inflation gathered steam. In those days existing mortgages were assumable by the next buyer of a house. Remember that mortgage rates and inflation rates peaked around 1980, pre-Reagan and pre-Volcker, at about 18% and 13% respectively. This meant that the lucky homeowners selling their house with a 6% assumable loan in an 18% new-loan-environment had a terrific selling point. So much so that it capitalized into a much higher market value of the house.
Trouble is, the mortgage might only be for 50% of the asking price. Enter the carry-back. The home seller would sell and create a 2d TD for 30% or 40% of the price, so the buyer would only have to come with 20% or 10% down. Terms of the 2d TD might be 10%, 3 – 5 years or so.
But the seller wants cash, not a note, so they immediately advertise in the classifieds (remember them?) or sell to a broker/middleman who would turn around and sell it. But who wants a 10% note in an 18% world? So the note would sell at a discount of, say, 50% or 25% off of face value. This bumps the effective yield to up to 15% or 20%. But if you buy this note, you are instantly buying safety because it is now at a better LTV. Plus, if the house sells or refi’s sometime in the five or so years till maturity, you must get paid off at FACE value, which makes the rate of return go through the ceiling. Trust me, nothing is more satisfying than to get a call from an escrow company saying your note is about to pay off and we’d like to confirm your address for sending the check! Ah, those were the days.
