Mighty Mortgages

If you’re scratching your head when I say the words “mortgage backed securities”, you’re not alone. But these may be the words that will lead to you to a financial breakthrough, not only in terms of understanding, but also your investments. To take the risk or not take the risk? To answer this, one must define first what a mortgage backed security, or MBS, is. So, what exactly is a mortgage backed security?

A mortgage backed security is a type of bond that is supported by a pool of personal loans that may be used to pay for the buying of home or other types of real estate property. While these loans are being paid off, the mortgage payments then are passed to the bondholder. These bondholders will be the ones to receive payments which typically are made up of principal and interest. Take note, these types of security are also called “mortgage related security” or “mortgage pass through”.

When a mortgage loan is extended by bank, commonly a commercial, savings and loan, or thrift bank, this process starts. The lender can sell these loans one by one and have them pooled by the purchaser, or the lender can group similar mortgages before selling. What happens subsequently is that after these mortgages have been pooled into their different groups, they are then securitized and eventually sold.

Sorted into how the payment process is done, there are three main types of mortgage backed securities: collaterized mortgage obligations, stripped mortgage backed securities and traditional pass-through securities.

First, collaterized mortgage obligations are characterized by the way they permit the creation of bonds with a possibility of risk and return. Cash flows are taken from a pass-through security into what are called “tranches”. These tranches are formed to accomplish distinct return goals, and manage risks efficiently.

Secondly, the stripped mortgage back securities create one or two new securities with cash flows from the original mortgage pass-through. Each of these new securities receives either principal, interest of a combination.

Lastly, traditional pass-throughs are known to give each investor in the pool a proportional distribution of the principal and interests formed by the homeowners.

Mortgage backed securities are beneficial because they usually give a higher yield than many other types of fixed income securities. However, the risks involved with mortgage backed securities are the sensitivity of the type to interest rate movements. Prepayment speeds, in particular, have a great hand in these types of securities, because if prepayment speeds are faster than planned, the bondholders are risking that their principal will be returned earlier than expected, as well as in a lower interest rate environment.

All in all, the essence of mortgage backed securities is that they are a type of asset-backed security that secures itself through a mortgage or a set of mortgages. You are in fact lending money to a home buyer or business, or vice versa. They are often used to redirect the interest and principal payments from a pool of mortgages to shareholders.

Bird-dogging or real estate jobbing is a great way to get started on a career in real estate investing. A bird dog is a property locater or deal finder for an established real estate investor. The bird-dog is paid a fee for finding these potential real estate deals. The amount of the fee can range anywhere from a few hundred dollars to several thousand. It all depends on the extent of the bird-dog’s involvement in the deal and the work he or she puts into it.

To earn top dollar as a bird-dog you are expected to see the homes, perform an analysis and negotiate the best price. You then present your detailed findings to your investors.

Bird-dogs will carry out their own marketing in effort to locate potential investment properties. This can include newspaper ads, direct mailings and physically driving around with a keen eye for opportunities. For more information on finding real estate bargains check out my previous post Where the Half-Price Homes Are and How to Buy Them.

There is a blurred line between bird-dogging, flipping and wholesaling. The difference lies in whether or not you get the property under contract. A wholesaler or flipper with actually get the property under contract and then assign the contract. This of course carries a lot more risk then simply presenting a deal and collecting a modest finder’s fee. If you get the property under contract you will be entitled to the difference between what you have it under contract for and what you sell it for. If you negotiate to purchase a $150,000 home for $110,000 and then sell it to an investor for $120,000 you will earn $10,000 instead of the standard bird dogger’s fee of around $1000. Investors like it when you have it under contract because then they know you are in control of the deal.

Which brings us to the question of whether or not bird-dogging is legal. In most states if you are brokering a deal between a buyer and seller, you required to be licensed. The key is that your fee is contingent on the closing of the deal. Many bird-dogs are in fact operating illegally. Again getting the property under contract bypasses this as you are then a principal to the deal and have something at stake. It is generally alright if you are merely identifying leads and selling the leads to investors. In this case you are paid a fee regardless of the deal closing. As always, consult with a professional in your area to be sure.

Another way to get started is with Maveric Real Estate Investments. They train you to find commercial real estate deals that they will fund.

The best advantage to starting as a real estate bird-dog or real estate jobber, is it gives you an opportunity to get your feet wet with investing in real estate, without assuming all the risk of a full-time investor. It gives you an opportunity to work closely with experienced people and begin to build your network. You will find you begin to develop mentor relationships which will prove to be extremely valuable.