A great source of high rate mortgages is the "shell" or pre-cut homebuilder. A shell (pre-cut) home is made in a factory on a semi-mass production basis and shipped unassembled to the land owned by the person who wants to erect the home.
This land he must own free and clear. The homebuilder or dealer then erects the home, but usually only the "shell" of the home. The owner must put in plumbing and wiring at his own expense. Frequently he performs the labor himself and contributes what is known in the building and mortgage business as "sweat equity."
The dealer creates the mortgage, which covers the land, the shell and all completion costs and labor. This mortgage he will sell so as to yield the investor about 15 percent return. It is a first, not a second, mortgage, and in addition it carries full recourse by the builder. If the homeowner defaults, the builder must pay off the balance due the investor.
In this case, however, just as in the case of the mortgage guarantee company, the investor must examine into the financial statement and credit reputation of the builder to see if his guarantee means anything.
These shell or pre-cut mortgages can be located by looking in the phone book and at newspaper advertisements of shell dealers in many states, including Virginia, North and South Carolina, Georgia, Alabama and Florida.
What then, in summary, are the characteristics of a good mortgage? What characteristics should be sought?
Good qualities include:
1. Equity of 30 percent or more and certainly not under 20 percent of the appraisal of the property for quick sale.
2. As much down payment on the part of the property buyer as possible. The more he pays down the harder he works to preserve his investment.
3. Good credit rating of the homeowner as determined by a credit check.
4. Good credit rating of the organization selling or guaranteeing the mortgage.
5. A simple interest rate of at least 12 percent on first mortgages and 18 percent on second mortgages (for mortgages not carrying any government guarantee).
6. A term of eight years or shorter.
One point must be brought out in connection with the term of the mortgage. Very often the seller does not tell you that at the end of the term of six or eight years, or whatever it is, there is what is called a balloon balance. If a mortgage is for $5,000 for five years and is payable at the rate of $50 monthly plus interest, the mortgage is reduced every year by $600 ($50 X 12). In five years five $600 annual payments have been made or $3,000 in all. But the mortgage was for $5,000. At that point the homeowner must scrape together $2,000 immediately. This he usually cannot do and the investor has little choice but to go on accepting $50 a month for 40 more months until the $2,000 balance is paid off.
Many people don't know about investing in shell homes, and they can be an inexpensive way to put your money into property, which almost always appreciates in value. They also offer a place to live while your investment appreciates. Even if the structure on the property is manufactured and not very valuable on its own, the investor can still make a decent return on the land if he holds onto it for five or 10 years. This is a good investment opportunity for newlyweds or couples with children who plan to stay put for a period.