RISK DEFINED… Webster says …the possibility of loss.
Any investment there is a possibility of loss but we have to look at the probability of loss.
The probability of loss in a stock is much higher than the probability of loss for a secured real estate mortgage note.
WHY LESS RISKY?
- We are buying the note at a discount to the value of the property (20-50%) and therefore if the property value goes down then we still have an equity cushion.
- We stand to make more money if the homeowner defaults since we have upside potential.
- Homeowners are emotionally attached to the home.
- No liability – If homeowner slips and falls then you are not liable as the “bank”.
- Property is insured – unlike a stock, the collateral (property) is insured.
POSSIBLE RISK FACTORS
- Legislative changes to the foreclosure process – low impact and states rules getting better.
- Federal oversight changes – low probability with current administration.
- Unexpected home value depreciation – low impact since buying at discount.
- Changes in CFPB or FDCPA rules and regulations – low risk since at peak of regulations and now introducing bills to remove or eliminate some of the regulation.
- Increase costs of foreclosure and legal expenses – cost have stabilized in recent years.
- Improper collateral – make sure you are working with counterparties you trust.