Well-off people who sell their homes sometimes decide to hold the mortgage for the buyer. This means that instead of the buyer writing monthly checks to the mortgage company, they write them to the previous owner. This can a good way to add diversification to your investment portfolio if you don’t need the money right away and have a significant amount of assets. These people are now receiving an unusual number of calls from people who are offering to buyout their note for 70 to 90 cents on the dollar.
The note-buying business is actually a legitimate business; however the people making these calls are victims of the latest dare-to-be-rich scheme. These people get suckered into coming into some hotel ballroom or convention center type event, pay a substantial fee to come, and then hear about how they can get rich by buying owner-held mortgages at a discounted rate.
The idea is that many note-holders might be more willing to part with the mortgage they either need the money, or don’t think the mortgage is no longer a solid investment. The note-buyer comes in, purchases the mortgage, and collects the principal and interest and comes away with a significant gain.
The problem with the pitch is that the note-buying market is not big enough to support all of the people who are signing up for the program. There’s maybe a market big enough for a couple of hundred people in the entire country who really know their stuff and professionals in the business. There’s just not enough notes for everyone to buy, and the people who actually know what they’re doing and don’t just go to a class in a hotel ball-room will be the ones making the real money.
Many of the people who attend these dare-to-be-rich seminars are also not in a financial position to get into the note-buying business. Quite often they are using borrowed money to pay for the notes that they buy, which ads a significant amount of risk to their life. If one of the people that they have given a mortgage to suddenly decide to stop paying, they’re in real financial trouble. If you’re not worth at least a million dollars, chances are having one mortgage note worth $200,000 is not the right thing to do. That’s like investing $200,000 into a single stock. There’s just too much risk there for it to make any possible sense. Investors need to keep a diverse portfolio and not make investments that make up a majority of their net worth.