In practical terms, another name for “mortgage.” Most commonly used in cases where the party making the loan is not a bank. That could mean various forms of owner financing, or private mortgages issued by investors to property owners.
As an investment vehicle, these usually take two forms. The first is the straight-forward loan itself: a party with money loans it to a home owner, in exchange for a claim on the property should the owner default. Most often this is seen in cases where the property owner is going to have trouble getting a bank mortgage. Reasons could include credit score, not enough money for a traditional down payment, or erratic income vs a predictable pay check, to name just a few.
A second version comes into play among those who already hold these types of loans. Sometimes such a holder will decide that a lump-sum now is better than waiting for the term of the loan to play out, so there is an informal secondary market for selling the debt to other investors. Again, private mortgages are what primarily change hands this way, though banks occasionally sell of mortgages this way too.
Typically these sales are driven by a concern that the loan may not stay current and it may be determined that the possibility of foreclosure is on the rise. Some investors simply don’t want to deal with those complications, so they put the paper up for sale. Usually at a discount. Which is where the buyers come in. These are new investors who don’t mind the risk or hassle and are happy to pick up the debt for some amount which is less than what is owed, less than what the collateral is worth, or both.
The first type of transaction is simpler and might be of interest to any investor looking to earn more than bonds. The second type is going to have more variance from one deal to the next and will require some expertise – either the investor’s or the investor’s lawyers’ and advisor’s – to navigate the complexities of foreclosure and resale if a default occurs. Which type will be best or preferable for a given investor will of course depend on that person’s investment goals.