Why Wholesaling Mortgage Notes Isn’t The Perfect Investment Strategy

Buying and attempting wholesaling mortgage notes have become an incredibly hot buzz topic in the last year. Yet, despite the appealing benefits being promoted by note sellers, brokers, gurus and some of the media they may not be the magical solution to easy and large profits from the real estate market that they are sometimes made out to be.

So what’s the real deal with buying, selling and flipping loan notes? What are the real pros and cons, and are there any better real estate investment strategies which may better help some investors achieve their objectives?

Wholesaling mortgage notes can be incredibly profitable. There is no question about that. Banks make millions every day by originating and wholesaling these debt instruments. Some have also certainly realized reasonable ongoing passive income from holding this type of paper. Of course many have also lost big, and that may be a scenario which continues to become more common for a variety of reasons.

The biggest challenge most face and why they completely fail and bankrupt themselves when trying to get into wholesaling mortgage notes is because most people have no idea how to properly evaluate notes or what makes notes valuable.

Obviously if you don’t know the value of what you are buying you don’t know if you are overpaying or not. And it’s hard to resell something for a large profit fast when you already way overpaid for it. This creates huge problems at all stages from creating to selling loans, and especially when investors get stuck holding non-performing notes while trying to season them.

It is entirely possible to borrow money to buy and flip them or even create notes yourself, though perhaps not as easy to flip for much larger spreads immediately.

Some target non-performing notes as an acquisition strategy to fuel other forms of real estate investing. Often this involves foreclosing on borrowers that continue to fail to pay. It’s a ‘good idea’, though not always as effective and easy in reality. When you’ve got a homeowner that refused to pay their $5,000 in taxes to protect a $200,000 property and has re-defaulted on a loan modification and still refuses to move it’s unlikely to be an easy, cheap or short legal battle.

In contrast directly wholesaling homes is different, and makes it much easier for those new to real estate to evaluate potential deals and provides them with a bigger retail market and more exit strategies.