An Unexpected Paradigm Shift: Is Holding Paper Still a Safe Option?


As a general rule of thumb, mortgage payments have been the top bill that has always been paid. However, high unemployment, sliding home prices and other economic kicks in the butt, have a growing number of struggling consumers doing what was once considered unthinkable: paying their credit card bills instead of their mortgages.

On the surface, that statement is almost a yawner. That’s on the surface. The complete story can be found on this article from Luke Mullins at US News & World Report: Forget the Mortgage, I’m Paying My Credit Card Bill

The article goes into the thought theology behind paying the credit card bill instead of the mortgage. What it doesn’t cover is the risk to real estate investors who have, or are thinking about, holding paper. Holding paper is, or at least was, a very viable option to sell property.

Taking A Second Look

Let’s take a second look at this new phenomenon. Suppose you sold a house and held $25K worth of paper to facilitate the sale. You looked at the buyer’s credit report and it looked very good. The buyer’s bank statements looked in order, plus all of the other due diligence shows a buyer that pays his bills.

You just made a great deal, at least on paper. I say at least on paper because none of these tried and true documents can forewarn you of a person who is about to experience problems. Future problems are the intangibles that make investors wish they elected another career.

For example, in my neck of the woods, job loss is a reality. Employers seem to be making weekly announcements of layoffs and future job reductions. A perfect, or near perfect, credit report won’t even hint that a job loss is in the eve. You learn about it, usually, when the mortgage payments stop showing up.

An Idea For Saving Your Investment

If I was the person who was thinking of holding the paper, at this point in time I would look a little deeper into the employer. Again, in my area, this isn’t too hard to do. The local employers aren’t shy about making announcements in advance. If someone was working for a company that recently announced layoffs, I’d have a tendency to question job stability. You probably would too, right?

If I felt the least bit queasy about the employer, I wouldn’t hold paper. Some people would, but I’m a little bit more cautious at this stage of my career. I realize you could, or probably, have figured you’d do the same thing. However, it doesn’t hurt to put it on the table. Better safe than sorry.

These truly are exciting times for real estate investors. All we have to do is stay on top of everything that might impact us in a way we haven’t even thought about. As my friend used to say, are we having fun yet?

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