One of the best kept secrets in real estate investing is clearly the practice of buying tickets. While buying notes, otherwise known as residential mortgages, may seem like a complaints process, it really isn’t once you take the time to understand how it works. And, the best part is that you can set up as a ticket broker and earn money simply by brokering the sale of a ticket from one person to another without ever having to dip into your own savings and investments to do so.
What is a remark?
A note is simply a mortgage that is secured by real estate. A note can represent a first mortgage, a second mortgage, a land contract or even a sales contract.
Why are tickets sold?
Have you ever borrowed money against a house, in the form of a mortgage? If so, then you have been the borrower on a note. Generally, if you borrow from a bank or a lender, you are quickly informed that your mortgage note is now held by another lender. So, although your payments are the same and the terms of the contract are the same, you are now sending your mortgage payments to another lender instead of the one you originally borrowed from. When this happens, your lender has sold your note.
Let’s assume for a moment that you take out a mortgage with Bank A for $100,000. This bank processes your mortgage and you start making your payments. Soon you are told that Bank B now holds your note and you should start making your payments to them. What happened is Bank A loaned you $100,000 to be repaid over 30 years. Bank B stepped in and paid Bank A $80,000 to buy your ticket today and is entitled to collect your payments. So Bank A takes the $80,000 today, and then Bank B in exchange collects your payments over the term of the rest of your loan. This gives Bank A an additional $80,000 to immediately lend to other people rather than waiting for your monthly payments to reach them.
Private Mortgage Investor Notes
In addition to the big banks granting mortgages and then selling them to other lenders, often people postponing mortgages on their paid-for properties will also sell their notes. In this case, they make you, the buyer, a ticket for a portion of the purchase price, then choose to sell the ticket all at once rather than holding it and collecting payments over time.
In addition to banks buying and selling tickets, you as a ticket broker can do the same. However, you can also simply negotiate the transaction between the lender and the buyer. If you know of a $100,000 note to be repaid over the next 25 years at an interest rate of 6%, you can buy that note multiple times for, say, $80,000 all at once. You then sell that note to an investor for $85,000. As a broker, this earns you a salary of $5,000 and you never used your own money in the process!