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:
- Investor advertises "We Buy Second Mortgages" in the local newspaper
- Investor receives calls and finds someone who is interested in selling their VTB mortgage.
- Investor makes an offer of 60-75% of the value of the mortgage.
- 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.