Dealing With Distressed Lenders

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Topics: Financing

I am always on the lookout to buy defaulted notes from small loan companies. You know the kind that advertises on TV to consolidate debts or to finance home improvements. These notes can be bought at large discounts because the small lender doesn't want to foreclose and have to make payments on the underlying 1st mortgage loans.

Once purchased at discount, the owners can be contacted to determine the reason for non-payment. Often the solution requires the purchase of their house. Or the Payments on the notes can be restructured and be brought current through the process of negotiation. In any event, it can be a very lucrative enterprise.

A little arithmetic might illustrate my point. Suppose you were able to buy a $3500 note with a $125 payment at 18% which had been in default for 6 months. The loan company might sell it to you for as little at $350. They might ASSIGN it to you, or they might SATISFY it if they were willing to completely release the original borrower.

In other cases, they might assign you the note but refrain from releasing the LIEN on the borrower. Now you'd go see the borrower and explain that you were going to foreclose if the payments weren't caught up. In lieu of foreclosure, you might buy the property under terms and at a price, which would be acceptable to both parties.

Alternatively, you might agree to just restructure the note in such a way that the face amount would offset lower payments. If the property were worth considerably more than the combined amounts of both loans, you could arrange a new first mortgage which would provide funds to pay off both loans and make the total payments within reach of the occupant.

All of these approaches are profitable. If you're able to buy the house at distress prices that's one way to proceed. But if you could restructure the loan so payment could be brought current, it would have a value in the discount market. You might be able to sell it by guaranteeing payments for as much as 75% of face value PLUS ACCRUED INTEREST.

Remember, your purchase price included all back interest. By personally endorsing the note you add value to it beyond its ordinary market value. Here's what your note could earn: $3500 plus 18% for 6 months' back interest when you bought it would be $3827.05 and 75% of that would be $2870.29. If you paid $350 for it you'd be making a profit of over $2500.

Of course, if you could either sell the property or get the owner to refinance it to pay off the note, you'd be getting 100% of face value and a profit of about $3475. On an investment of $350. You can see how this return on your investment dwarfs those normally associated with precious metals, securities or other forms of real estate. Properly presented, it isn't too difficult to attract investor dollars from those who can see you earning these huge profits on small investments.

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