THE BIG PICTURE
NUTS & BOLTS
NOTE INVESTING
NOTE INVESTING
AmericanNote Investors Gain IncreasedAccess to Growing International Markets THE SPANISH HOUSING RECOVERY COULD BE GREAT FOR YOUR PORTFOLIO.
HowMortgageNotesWork A BRIEF GLIMPSE INTO THE LIFE OF A MORTGAGE NOTE.
byW.J. Mencarow
I
nvesting in mortgage notes has made many people very wealthy and created cash flows for them that come in every month. I think of notes as cash-flow machines that you build, plug in, and then they produce income for you for years. The best news? There is no limit to how many of these machines you can build if you have the right tools. Most people have some idea of what a mortgage note is, but not that many really understand how the investment vehicle might work for them. Here, we examine the life of one mort- gage note to demonstrate the vast potential in note investing.
the note. In total, John will have received $229,262.60 for his $200,000 note. John decides this is a good deal. Here’s what Bob has to consider: $128,000 invested returning $1,687.71 a month for 10 years gives Bob 10 percent interest on his money. In the unlikely event that Jane defaults, Bob can foreclose and get a $250,000 house. The collateral is worth far more than the investment. Jane has paid reliably for five years. Bob is getting a 10 percent return on his money. Bob decides this is a good deal. Results: • John sells the note to Bob. Jane continues to pay her mortgage on time to Bob.
by Laura Chalk
T
Second, European Union (EU) privacy laws govern how an investor may interact with the borrower on a Spanish note. These laws are different from U.S. privacy laws. The EU’s General Data Protection Regulation (GDPR), and other related policies, strictly regulate how information on citizens of its 28 mem- ber-countries may be collected and utilized. These regulations apply to foreign note investors and other foreign companies. “Sharing information can be done, complying with GDPR, but both seller and buyer need to explicitly, through consentient dec- larations, declare their will to share the information,” Arimont Lincoln explained. “[In Spain], real estate and loan information is private and cannot be known by the public. For example, transaction REO prices are private; you get to know only the ask- ing prices of the market, but never closing prices.” INTERNATIONALNOTE INVESTING ONLINE AffinityWorldwide company LoanMLS and LEMLoan eMarket worked together to launch an online portal that facilitates Spanish note buying and selling and is compatible with smart phones and tab- lets. It brings registered users, comprised of loan sellers and investors, brokers and institutions looking to buy individual loan assets and loan portfolios, together online for fast, convenient transactions. The secondary note market in Spain is presently rife with oppor- tunity for investors as its national housing market stabilizes. Average property prices rose 3.8 percent nationally, and Madrid and Mallor- ca both experienced double-digit appreciation over the past year. With the Spanish housing recovery well underway and plenty of room in the market for additional months or years of appreciation, more home-buyers are likely to begin looking for purchase op- tions and, as a result, the note creation business is well-positioned to flourish in this country. •
he Great Recession did not only affect the American housing market. It impacted the world economy. In
Spain, the housing market also struggled. As the Spanish hous- ing market stabilizes, American real estate note investors are looking overseas for new opportunities. With the advent of new technology in the note-investing sector, real estate investors hop- ing to leverage international real estate trends in their portfolios are better positioned than ever. Before diving into any foreign real estate market, however, investors must make sure they are correctly positioned to invest their capital legally and with the greatest degree of protection and advantage possible. “The most recommend-
THE NOTE IS BORN: JOHN SELLS TO JANE John sold his home to Jane for $250,000. She put down $50,000. Instead of getting a loan from the bank for $200,000, she signed a 6-per- cent-interest, 15-year note to John secured by a mortgage on the house.
THE NOTE’S LIFE ENDS: JANE SELLS THE HOUSE
able way for a U.S. investor to invest in Spain would be to establish a local invest- ment company with limited responsibility: a Sociedad Limitada or SL,” said Miguel Arimont Lincoln, CEO of LoanMLS partner LEM Loan eMarket. Arimont Lincoln noted there are two main differ- ences between U.S. note investing laws and Spanish loan investing governance. First, in Spain, legal proceedings can extend foreclosure times past lengths American note in-
Jane lives in the house for another three years before she takes advantage of rising home values and sells the house for a healthy profit. The new owner takes out their own loan on the house and pays Bob in full.
As the Spanish housing market stabilizes, there is great opportunity for American real estate note investors. However, two big differences exist between U.S. note-investing laws and Spanish loan-investing governance:
Results: • Jane makes principal and interest payments to John of $1,687.71 per month. • John sells his house and gets $50,000 in cash along with a monthly income from the note of $1,687.71.
Results: • Bob received three years monthly payments of $1,687.71 a month and a lump-sum payment of the remainder of the debt. • Jane no longer owes any money on the note and has plenty of money to buy another house (or anything else she likes!) Note investing is not always quite this simple, but this example demonstrates the massive potential in this investment strategy. •
THE NOTE MOVES ON: JOHN SELLS THE NOTE TO BOB
1. Foreclosure timelines 2. Privacy laws
Five years later, John needs cash. He can sell Jane’s note without changing the payment and terms on Jane’s end. Bob will pay John $128,000 for the note. Should John accept? Here’s what John has to consider: John has received $1,687.71 a month for 60 months, so Jane has paid John $101,262.60 so far. Bob offers $128,000 for
vestors might expect. Foreclosures can take between six months and two years. Investors should familiarize themselves with the foreclosure process in Spain before buying a note in case they must foreclose on the property.
W.J. Mencarow is president of The Paper Source, Inc., an educational organiza- tion for note investors and brokers since 1987. To learn more about note investing, including what can go wrong and how to protect yourself, take a free 7-part e-course at www.PaperSourceOnline.com
For more information, access LoanMLS.com, www.loanemarket.com or email info@loanmls.com.
92 | think realty magazine :: august 2018
thinkrealty . com | 93
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