Buying mortgage trail books. Building income and building business???

Hi all,

Just wondering if any of the experienced mortgage brokers here would be able to shed some light on the viability of purchasing someone else's trail book to earn a passive income (of sorts) as well as using it as a base to start a new mortgage broker business.

Few specific questions I'm hoping to get clarified to assist me here:

1. How much is the runoff p/a of a trail. Lets say if one bought a trail of $100k p/a, if the trail was not touched at all, how long will it take on average for this base to reduce down to zero taking into account pay backs, sales and refi's out.
2. How do you actually value a trail book? From the research I have done I believe around 1.5 to over 2 times the trail amount p/a is what you could expect to pay but not sure if there is an actual formula to follow. Maybe a present value model of sorts I'm guessing?
3. When an existing trail is bought, I'm assuming one would be able to get in touch with everyone who holds a loan under that trail to try and retain/win new business? If this is the case, what do the loan holders think when they have some random broker call them saying "heyy, im managing you now" Have no idea how this aspect of it works so any clarification would be much appreciated.
4. Would buying an existing trail, lets say $50k p/a, be the right way to go about it if one wanted to start to build a mortgage broking business or just try and get out there as much as possible (I am not taking into account skill/experience here but lets assume we are a competent residential lending specialist)

I'm sure there are a million other things to consider here, but have been very interested in the concept of buying a trail book but finding it hard to source reliable info. The idea of an income stream (although diminishing) as well as an existing base to work from seems attractive.

Would be interested to hear some thoughts!

 

There are more that a few business type brokers out there putting buyers and sellers in touch with each other. prices will vary depending on how many fixed loans, arrears rates, life of loans etc.

You may buy the income stream but not the right to market to the client or you may get both. You have to expect that many of the clients won't like being contacted by a stranger too - especially to be sold something.

 

1. See your answer to 2. It's valued as if it will run off within 2 years.

2. That's how they are valued. Most experienced brokers would say they are expensive as they could just write that business themselves, for free. Most people new to industry think they are cheap.

3. Not necessarily. There may or may not be a database attached. Some are sold specofically without contact details.

4. I'd give it a go without a book first. Perhaps buy a database of potential clients and practice database management. Also it's pretty hard to buy a book. They are rarely sold and then there are a couple of companies that specialise in buying them who monopolise the market.

 

There's very little supply in mortgage books at this time, which is pushing the multiples up accordingly.

I've been seeing D Grade books pushing 2.5x as of late, which is absurd.

I wouldn't bother with that type of capital expense in a book to try get the business off the ground.

 

I don't know anything about trails or trail books but as a residential property investor, I can tell you I would not be happy if my broker sold me to a stranger. I have built up a working relationship with my broker over time and trust him. However, I have no relationship with a stranger and therefore no trust. I don't know how many people feel this way, but to let you know that I would definitely switch brokers.

 

@Perthguy I do agree with you, I'd also not want to deal with a complete stranger.

In most cases, the party buying the trail book doesn't actively market to that database, they're interested in buying the revenue stream. It could be argued that you don't want the trail income from your loan go to a stranger, it should be going to the broker that you've got the relationship with. At the same time, your broker is selling it and receiving money for that sale.

For most brokers, selling their their trail book is an exit strategy from the industry, often at retirement. Realistically at this point you're not going to be dealing with that broker again regardless of the arrangements they've made. If their arrangements leads to another particular individual or company, at that point you've got a choice.

I once thought that given when people are willing to pay for a trail book, it's not really worth selling, there's more income to be had over time even though it does reduce. Given the strategies that can be implemented for transitioning to retirement, super concessions for small business and so on, I can see the merit in it. Fortunately it's still a very long way off in my case.

 

I actually would not have an objection to this. My broker has worked really hard for his trail income and from my point of view, has well and truly earned it. If he wants to sell it, it's up to him. I would not object.

 

Hmmm, some interesting points above. So it would be expected that an entire trail will run off in two years??? That seems a bit steep especially when considering you pay 2x the trail amount. If I paid $100k for a $50k trail, it will dissapear before its even turned a profit! Doesn't make much sense if they are going for that much and are lasting only a short time....

 

Certainly not the case!

 

This two year figure was based off Tobe's post above. Given your experience Terry, what would the expected lifetime/runoff be of any average trail book assuming I have bought one and not touched or maintained it? Really interested to see if the numbers stack up from an investment perspective.

 

There wouldn't be a general answer.

All comes down to the size and mix of the book - owner occ v IP debt, P&I loans v IO loans, fixed v variable, age of loans, remaining terms.

A non trading broker would lose a fair few clients in the first two years - but wouldn't lose the bulk of their book. I'd take a guess at it being around 5 years - I have absolutely no way of backing that up though

Cheers

Jamie

 

Its like the half life of uranium. It goes on for 30 plus years, slowly diminishing each month, with some dropping off completely as they refinance and sell.

 

In total you will probably get 2 years of income. It might take 3 or 5 or 7 years as it tapers. You might be lucky and still have loans 10 or 15 years in. Perhaps buying one now that was investor heavy might mean a long taper as investors find it harder and harder to refinance at the moment.

 

That's it. A totally un managed relatively old book will reduce by 25-30% annually getting ever smaller but taking probably 10 years to get close to $0.

A managed old book maybe 10-15% run off pa on old loans but some rewritten as they are refinanced.

A newish book (oldest loan less than 3 years old) which is managed can be very low run off circa 5-7% pa.

That's my experience anyway. The mix of loans also makes a big difference. If you have a very rate focussed owner occupied loan clientelle with one off transactions expect these to be paid off / refinanced more quickly

 

Oh and they are worth way more than what they sell for IMO. 3 times annual is fair value in my mind for a decent book with decent client mix.

If you can find one its definitely worth considering IMO but no substitute for hard work in building your own business.

 

Ahh thanks for the detail there Marty. Given the premium paid to purchase a book, I would have thought that at least five years of returns would have been the bear minimum to make any investment sense and your comments above validate that.

Besides internally within aggregators, is anyone aware of any websites/companies that facilitate the purchase/sale of trail books???

 

Dumb questions!

1. What sort of yearly return profile do you typically get on a mortgage book?

2. What rate does the typical mortgage book decrease in value?

 

None that I could personally recommend outside my aggregator.

Approach this carefully - pretty sure there's some dodgy operators in this space. My spam folder cops a lot of their emails.

Cheers

Jamie

 

Thanks for all the info guys. A lot of food for thought. Interesting to hear Marty that you think they are undervalued whereas I thought the general consensus was they were overvalued! Probably the ones that dodgy operators sell as Jamie had referred to

 

I would imagine books full of long fixed rates would sell for a premium but then again don't expect the angry client who got locked into these to stick around when they do expire.

Whilst I don't like the idea of dealing with a complete stranger I do think if you were a good marketer with strong customer service skills that you could retain a fair bit of the book. Not everyone knows a mortgage broker and not everyone trusts banks.