Companies Cater To Mortgage Holders Who Need Quick Cash

Several readers have written recently to ask about companies that buy real-estate contracts and deeds of trust. If you are carrying the contract for real estate you've sold, one of these companies has probably contacted you.

Many of these firms are one-person shops run by astute investors who know that mortgage-backed securities are very salable. These people can make a living by acting as the middle man - buying contracts and deeds of trust from consumers and selling them to pension funds and life-insurance companies. Some of the larger firms that buy contracts and deeds keep some of them in their own portfolio of investments.

Big or small, companies that purchase contracts and deeds of trust provide an option for mortgage holders who need cash in a hurry. Illness, college tuition or a much-needed vacation can be reasons to cash out all, or a portion, of a mortgage early.

Three local firms - Mortgage Equities in Edmonds (1-800-448-3393), Everett's Statewide Funding and Investments (1-800-767-1239) and Sound Investments in Gig Harbor (1-800-827-2049) - have been offering free quotes by mail. However, don't expect to get the face value of your principal balance in cash. All three firms "discount" your mortgage for cash to meet their "yield requirement" which basically means a return on their cash investment.

For example, let's say you sold a home, pocketed a large down payment and financed $30,000 for the new buyer at 9 percent interest over 15 years. You are now receiving monthly payments of $304.28.

If you sold this mortgage for immediate cash, a company that buys contracts and deeds of trust would pay you $20,218 for the mortgage. Why would you take less than the current balance of $30,000 not including the interest you would earn over the term of the contract?

That depends on how urgent your need for cash or on how you will apply the lump sum. For example, if you took the $20,218 and applied it directly to your $50,000, 30-year home loan with a 10 percent interest, you would eliminate $93,273 in future interest payments.

We always tell the seller to structure the loan much like a bank structures a loan," said Darrell Devine, president of Mortgage Equities and former president of the Seattle Mortgage Bankers Association. "That way, you will have an easier time selling it. You never can predict a financial emergency. Individuals, unlike financial institutions, have many more reasons for selling."

It's also possible to sell just a portion of the mortgage contract. Assume you have an immediate need for a college tuition payment and you hold a $30,000 mortgage with 10 percent interest for 15 years. You could sell only 84 payments for $16,706.44 in cash and continue to carry the remaining principal balance of $21,245.32.

According to court records, there are 34,000 seller-financed properties annually in the Interstate 5 corridor of Washington alone. This means that many people prefer dependable monthly payments over time to lump-sum cash settlements when they sell real estate. The reasons for this vary greatly, but often capital-gains tax consequences and a desire for a reliable supplemental income surface as the common explanations.

Also, seller financing is an easier way to sell real estate because the buyer does not have to undergo the institutional financial scrutiny dictated by conventional lenders. Often, buyers are deemed "unbankable" for not being able to show the income, credit or employment information required by conventional lenders. Those requirements can stymie self-employed, retired or first-time buyers.

If you are considering seller financing, make sure you can sell the mortgage if you want to.

And, if you sell all, or a portion, of your investment, require the buyer to explain all payoff schedules and possibilities and check the information with an accountant or adviser. It usually pays to be thorough.

Tom Kelly is a private real-estate consultant. His column runs Sundays in the Home/Real Estate section of The Times. Send questions and comments to Tom Kelly, P.O. Box 70, Seattle, WA, 98111.