Wealth Strategy: Buying 2nd Mortgages I

I was going through some old stuff and found an old finance book that was written in 1990 called Wealth Building without Risk For Canadians.  Within this book had a whole chapter on investing in second mortgages.  I'm not sure how common these second mortgages are these days but as I am interested in real estate investing, this strategy really caught my eye. 

There are times when a home vendor is willing to be the lender and do a vendor take back mortgage (VTB) in a 2nd position to the first mortgage in order to sell the home.  A lawyer would draft the terms and conditions which can have multiple variations.  For the purposes of this article, we'll assume that the VTB mortgage is in the second position behind the first mortgage and the payments due are interest only (like a bond).

The key behind this strategy is the idea that some VTB vendors would be willing to SELL you their mortgage at cash discount.  Why would they do this?  Some people would rather have, or need, the cash now and they're willing to sell it at a discount to achieve this

The author of the book suggests to start the offer @ 60% but pay no more than 75% of the value of the mortgage.  Another rule that the author follows is that he will only purchase a mortgage if the sum of all mortgages on the property is less than 80% (ie. < 80% LTV).

You're probably thinking "who in their right mind would sell their investment for 60 cents on the dollar?".  Well, apparently a lot of people as the author claims that he's been purchasing these types of mortgages for years.

How do you find these mortgages:

  • The local registry office should have public information regarding mortgages on every property in the city.
  • Local real estate professionals: mortgage brokers, real estate agents, lawyers.
  • By advertising in the paper "We Buy Second Mortgages" or something similar.

Here is the jist of the strategy:

  1. Investor advertises "We Buy Second Mortgages" in the local newspaper
  2. Investor receives calls and finds someone who is interested in selling their VTB mortgage.
  3. Investor makes an offer of 60-75% of the value of the mortgage.
  4. Offer is accepted and investors starts to collect payments.

Tomorrow, i'll continue with part 2 of buying second mortgages which includes an example along with the pros/cons that I can see from this strategy.

If anyone has any experience with this type of investing, I'd like to hear from you. 

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Rob
12 years ago

That author was Charles Givens, and he was a con artist. I don’t think that I would follow any of his advice.

Rob

Ed Kelly
12 years ago

This is to K.K, ——–I may be interested in buying your 2nd. What ate the particulars and what is the discount? Thank you—-EK

KK
12 years ago

I have a second mortgage to sell if anyone is interested

Debt Reduction
13 years ago

I’m thinking this will be a good thing in about 2 years. Until then I would be careful to not invest in any real estate where the total of all leans is greater than 70%, maybe more like 60%.

This has become a touch market!

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Q Cash
13 years ago

FB

Yes, but remember we are dealing with owners not rentals. Most owners try not to do that, as they are entitled to anything left over after the sale.

Also, keep in mind that you have to be comfortable with the LTV at the time of the mortgage, but property values generally go up too.

FT has asked me to provide a guest blog about my experiences (which I will try to get to him over the weekend) and I can give more details.

As for a big market, I know many many people who try to do the second mortgage at higher rates to avoid paying the CMHC fees on the first.

Q

Wealth Strategy: Buying 2nd Mortgages II | Million Dollar Journey
13 years ago

[…] FrugalTrader05:00 amAdd comment In part 1, we discussed the bare bone basics of buying 2nd mortgages as an investment.  Today we'll […]

The Financial Blogger
13 years ago

Qcash, I did not know about that. But don’t you think that there is still a risk to not get the your full repayment in case of default?

For example, if the guy does some damage to the property before he leaves, chances are that the 1st rank will be able to cover his expenses but not the 2nd rank…

Is there a big market for 2nd rank mtg in Canada?