January 2, 2008

Banker or Landlord - Which would you like to be?

By: Carl DeFranco, DeFranco Real Estate & Mortgage
(716) 990-3228

Yes, you read that title right... Why not be the Banker instead of the landlord? For years we have been taught that owning rental property is the way to go. But what if you were the banker? All the profits and none of the headaches.

Investing in mortgages in Western New York is certainly not a new thing. I have studied hard to create a product and bring it to the Western New York market in such a way that the normal every day working person can participate and profit. Using our product, investment mortgages are not just for the big guys any more.

It was my desire that a product be brought to the market that would offer the working person a chance to make better than average returns, with some sort of safety net as back up in case of default. There is no investment that is without risk. We do everything we can to mitigate the risk and management of your investment; however it is always my recommendation to consult with your legal/accounting professionals before taking on any investments.

Before we start let me answer some of the most common questions that I come across about mortgage investing in WNY:

Q: What is DREAM?
A: An acronym for DeFranco Real Estate and Mortgage

Q: What is a mortgage?
A: A contract that pledges a specific property as security for payment of a loan. The loan is detailed in a Note.

Q: What is a first mortgage?
A: AKA being in first position. This means that with very few exceptions the investor in first position gets paid first in the event of a default. For the safety of our investors, DREAM only handles first mortgages.

Q: What is an investment mortgage?
A: It is an investment mechanism where the mortgage holder (mortgagee) is the investor. For example, if a person goes to the bank for a loan, that person (mortgagor) would give the bank a mortgage to secure the loan. The bank is said to be the investor.

Q: What is a Loan Service Agreement?
A: It is a document signed by a mortgage investor and a loan servicing company detailing their relationship.

Q: How does DREAM make its money?
A: DREAM gets paid a percentage of the payments it collects on behalf of the investor. DREAM does it’s own in house mortgage processing to ensure only the best situations are funded. After all, DREAM gets paid ONLY if the investor gets paid.

Q: Is there any fees to begin investing in DREAM mortgages?
A: There is a one time processing fee of one percent of the original amount invested. It is used to offset the cost of paperwork and fees associated with bringing on a new investor.

Q: As a percentage, how much could I expect to make?
A: Presently, investors are netting 11% with an APR slightly higher.

Q: What is return on investment?
A: It is the money that you make as a result of the money you have invested.

Q: What is meant by Loan to Value (LTV)?
A: A properties (market) value is determined by a current appraisal, done by an accredited firm and ordered by DREAM. We accept no others. They are sometimes adjusted in house. We will then loan up to approximately 50% of the adjusted appraised amount.

Our Investment Product

Q: What is an investment mortgage?
A: An investment mortgage is an asset. It is a legally recorded instrument that would appear on your financial statement. It is secured by real estate. It may be bought, sold or borrowed against.

When a property owner is purchasing, refinancing or wishes to take equity out of a property in the form of cash, that person would go to the bank. In this case you are the bank. And DREAM is your “Mortgage Department”.

Q: Is an investment mortgage a security product?
A: No. You own the mortgage entirely and have full rights. Your name is vested on it and it is officially recorded in the county records.

Q: Are investment mortgages a safe investment?
A: As with any investment, DREAM recommends that you include your Accounting/Legal professionals in your planning. No investment is without risk; however at DREAM, we are proud of the efforts we make to reduce risk to our investors. After all, we are investors too!

Q: What safety features are built into DREAM mortgages?
A: We do every thing we can to choose borrowers with the highest likely hood of paying. Some of the ways we do it are: charging no points to the borrower and creating short term interest only loans to keep the borrowers payments manageable and giving them a chance to get institutional financing in the near future. Just to name a few.

Q: How much or little may I invest?
A: Our mortgages run from about $15,000 to $200,000. So far all of our mortgages have been owned by single entities. DREAM is not yet able to fractionalize notes.

Q: What terms may a borrower expect?
A: Through years of experience and study, DREAM has a standardized product that works well for most investors and borrowers. That is not to say that there is no room to accommodate an investor’s or a borrower’s particular situation, but we start with a basic package and work from there.
Without adjustments, a typical loan would have terms of:

50% Loan To Value, 14% monthly interest only payments, with a two-year call, First position to our investor

Property & Borrower Qualifications

Q: Can DREAM’s mortgage as Investment program be used to finance someone’s home?
A: No. DREAM’S mortgage as investment product is for commercial, income producing or business properties only. We have no Mortgage as Investment product to serve owner occupied residential borrowers.

Q: How does DREAM decide which properties & borrowers to invest in?
A: Of course, not every request for funding is processed by DREAM for a mortgage loan.
We choose a conservative path, and only loan in the vicinity of 50% Loan To Value. Our concern is with the real estate being mortgaged, much more than the information on borrower. We have had borrowers of all kinds, good credit, and bad credit, able or not able to get financing elsewhere. We even service borrowers from Canada and the UK.

Q: Are there geographic limits to your mortgages?
A: Presently DREAM only services Erie and Niagara Counties, New York.

Q: Isn’t there great opportunities else where in New York for this service?
A: Yes, however, we are here to serve our investors. It is important that we do not spread ourselves too thin.

The Loan Origination Process

Q: Why does DREAM do its own mortgage origination?
A: For control. We want to know as much about the property and borrower as possible. We could farm that service out, but we know that for the maximum security of our investors, we would rather do it ourselves.

Q: How does a request for funding actually become a mortgage instrument?
A: DREAM has a highly experienced loan processing staff. Upon getting the go ahead that a funding request will be entertained, they go to work accumulating documentation of many kinds on the property and borrower. On the borrower, in most cases a 1003 form or basic standardized mortgage application is requested along with a credit report. Along with identification verification, including a patriot search (not required, but done as an extra safety feature for our investors) these paint a pretty comprehensive picture of a borrower.

On the property, a new appraisal, updated title search, surveys, tax search. UCC search and in many cases a site visit by a DREAM staff member.

All of this information is received and processed. An offer to finance is issued to the prospective borrower along with an estimate of their closing costs. When requested, we work with the borrower’s attorney to ensure everyone is comfortable with the process and the product.

We enjoy many referrals form investors, borrowers and attorneys. That is a good measure of how easy we make it.

Matching an investor to a loan

Q: What is the process for determining who gets which loans?
A: For the greatest part, mortgages are made available to investors on a first come, first serve basis. It is not unusual for an investor to establish a relationship with DREAM and have to wait a little while for an opportunity to come available. On the other hand, some times there is an inventory available to work from, and investor can get in immediately.

Q: Are all mortgages created equally-risk wise?
A: Remember, DREAM gets paid a percentage of the payments it collects on behalf of an investor. It doesn’t help us one bit if some one defaults. When DREAM processes a mortgage for an investor, it certainly has that in mind.

The Loan Closing Process

Q: Is the investor involved in the loan closing process?
A: It is not necessary for the investor to be involved. In the case where a loan is assigned to an investor prior to closing, the investor or their representative may attend the closing as an observer.

Q: How and where are the loans closed?
A: Situations vary with attorney schedules, availability of venues and recording procedures. In the case of mortgages, the terms have all been worked out and accepted in advance and it is only a matter of signing documents. We use the courthouses, attorneys’ offices and we also have a closing area in our office.


Q: What documents will I receive as evidence of my investment?
A: The first document you will sign and keep is the DREAM Loan Service Agreement. It outlines the relationship between the investor and DREAM. It also serves as your receipt for the funds to be invested. After the recorded mortgage, which lists you as the mortgagee, is returned to us by the appropriate County Clerk’s Office, it is put into a package along with the Note and a fully executed copy of the loan service agreement. That package is then put into a filing envelope and sent to the investor. The configuration of the envelope is such that it can be used to store the records for the entire investment.

Q: Who keeps tract of payments, late payments and records relating to the mortgage?
A: We do it all for you. You will receive a monthly (or quarterly-depending on your preference) running statement of activity on your account along with any other communications relevant to the servicing of your investment.

Loan Servicing

Q: I understand that DREAM collects the payments, but who handled all other matters that may come up?
A: DREAM does. Our loan servicing department handles your incoming payments and if necessary, late fees in accordance with the Loan Service Agreement. We also keep a check on the general maintenance of the property, monitor compliance in the paying of real estate taxes, and hazard insurance.

In the event of a default DREAM immediately becomes the property manager and begins the process of disposition for the investor.

On the eighteen month anniversary on the mortgage a letter goes our to the investor and the borrower, asking their intentions upon the call date. DREAM then takes the appropriate actions to ensure that all goes according to their plans as close to that date as commercially possible.

Payments and reports on my investment

Q: How and when do I receive my return on investment?
A: We collect the payments directly from the borrower. That money is deposited into a dedicated account for incoming payments. On the 25th of each month-or the beginning of each calendar quarter (your choice), we cut and send your check for that period. Some investors have opted to open an account at The Bank of America, (That is where our company accounts are) where we can transfer the funds directly into your account. On our end, they are blind accounts. We can only make deposits into it, we do not have access to information it contains. Another method is to keep us supplied with deposit slips. If it is going to Bank of America, we will gladly make the deposit at the teller’s window on your behalf.

Q: What about late payments?
A: When DREAM collects a late payment on behalf of an investor, we pass 100% of that late fee on to the investor. It will appear with the next monthly or quarterly disbursement.

Q: Do I get some sort of statement from DREAM?
A: Yes, you will get statement based on the monthly or quarterly schedule you choose.

Interesting in hearing more about Mortgage Investments? Call me today at (716) 990-3228 to find out how you can start investing in Mortgages in the Western New York area!

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