What is your opinion on First Position Commercial Mortgage Notes that pay 6-7% interest income ? Legitimate or scam? Pros and cons?
Terry Says: I have been asked similar questions frequently and my answer is always the same. Avoid these “deals” like the plague– unless this is high-risk capital and you are willing to lose a great percentage of your money!
Think about it. Today you can get mortgages in the 3-4 percent rate, and about the same level for commercial mortgages. Who takes out a mortgage for 7 percent or more? (You can be sure the original note-payer borrower is paying at least 2 points higher to borrow the money, so the people offering you this “great deal” can make a profit by pocketing the difference between what the borrower is paying and what they are offering to you!) The original borrower must be a terrible credit risk — and can’t get a loan at a bank. Why do YOU want to be the lender to these people.
Often they tell you that this is a “pool” or package of mortgages! OK, that means you get LOTS of bad credit risks in the same pool. Why dive in?!!!
And that’s assuming that these are real mortgages, and that there are not other prior liens on the property, and that you can afford a lawyer to sort through the package if some default.
Get the picture? I know people are searching for higher yields. But the risk is even greater than the yield they are offering. I think you get better odds at a casino!