Has Anyone Here Bought a Real Estate Contract?

[Maddy]

With both stocks and bonds in the toilet, with inflation destroying the value of cash, and with interest rates soaring, the idea of becoming a lender is making more and more sense to me. The idea would be to buy a contract from an existing secured lender at a discount, one that provides for the remedy of forfeiture (i.e., the buyer fails to pay, and the lender gets the property plus all the payments made to date).

Has anyone here done such a thing? Successes? Pitfalls?

[glennds]

I have a couple of acquaintances that went in on this kind of business idea shortly after the 2008 crash. I took a pass on being involved, but it worked out very well for them financially.
A key ingredient was that one partner is an experienced bankruptcy creditor attorney. As a result they had deep expertise on the local and federal laws regarding their creditor and encumbrance rights and remedies. They also had the resources of an existing law office to use as needed.
Most lenders didn't want to sell a performing loan with a good debtor at a discount. The opportunity was on loans that had some doubtful element hence the lender's motivation to take a hit to get rid of them.
I also recall there was some post-bailout regulatory change that penalized lenders for holding doubtful loans so there was a unique motivation at the time for banks to offload them. Hence the discounts were steep. I just don't know if those same market conditions exist today.

I might add, these guys had a moderately (highly?) predatory attitude. If the loans performed and they collected their coupon, fine. But if the loans defaulted and they were able to foreclose on the property at a low basis, they were even happier.

With the direction things appear to be heading there's probably money to be made, if you put together the infrastructure and that kind of business appeals to you.

[Hal]

With both stocks and bonds in the toilet, with inflation destroying the value of cash, and with interest rates soaring, the idea of becoming a lender is making more and more sense to me. The idea would be to buy a contract from an existing secured lender at a discount, one that provides for the remedy of forfeiture (i.e., the buyer fails to pay, and the lender gets the property plus all the payments made to date).

Has anyone here done such a thing? Successes? Pitfalls?

Depends who you are lending the money to... Some unsavoury types have been known to burn the house down/intentionally damage it when about to lose the property. A family member had first hand experience with this.

PS: Also depends on how Socialistic the state is. From memory it took about a year to get them evicted.

[vnatale]

With both stocks and bonds in the toilet, with inflation destroying the value of cash, and with interest rates soaring, the idea of becoming a lender is making more and more sense to me. The idea would be to buy a contract from an existing secured lender at a discount, one that provides for the remedy of forfeiture (i.e., the buyer fails to pay, and the lender gets the property plus all the payments made to date).

Has anyone here done such a thing? Successes? Pitfalls?

Depends who you are lending the money to... Some unsavoury types have been known to burn the house down/intentionally damage it when about to lose the property. A family member had first hand experience with this.

PS: Also depends on how Socialistic the state is. From memory it took about a year to get them evicted.

GREAT attachment! Thanks!

[glennds]

Depends who you are lending the money to... Some unsavoury types have been known to burn the house down/intentionally damage it when about to lose the property. A family member had first hand experience with this.

Hal,
This risk is why it is US practice that the lender requires property insurance and is named as an additional insured under the policy. The lender will collect the estimated premium with the monthly mortgage payment, impound it, and make direct payment to the insurance carrier. If the house is burned down or damaged, the insurance company is now obligated to make the lender whole.
BTW, the same impound payment practice goes for property taxes so the lender can eliminate property tax lien risk.

If someone is going to "buy a real estate contract" it is important that they know these things and have the administrative capabilities to manage the loan. I would not call it passive investing, not even close. Lender beware.

[Maddy]

I wonder what the rate of default is on real estate contracts (with right of forfeiture) as opposed to your normal deed of trust. I would think that when the penalty for default is to lose all of one's equity, there would be an unusually strong incentive to stay current. Of course that presupposes that the value of the property hasn't declined to the point where there IS no equity.

[Mark Leavy]

I wonder what the rate of default is on real estate contracts (with right of forfeiture) as opposed to your normal deed of trust. I would think that when the penalty for default is to lose all of one's equity, there would be an unusually strong incentive to stay current. Of course that presupposes that the value of the property hasn't declined to the point where there IS no equity.

Unless you have industry specific knowledge the "no default" ROI on the investment directly maps to the expected default rate.