I regularly offer to buy defaulted notes from small loan companies. You know the kind that advertise 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 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 exert, it can be a very lucrative enterprise.
Here again, 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 payment. 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 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. property presented, it isn't too difficult to attract investor dollars from those who can see you earning these huge profits on small investments.
There's a way to work with investors in buying defaulted paper. In the above illustration, suppose instead of selling the note or refinancing the property, you agreed to allow the debtor to REPLACE the note with one carrying the same interest, but with a face value of $5000 and payments of only $75 per month. It might have a balloon payment due in 3 years. That 18% interest would be attractive in today's market especial if you guaranteed it to an investor.
Suppose you offered him an equity interest in it for $2000 cash. Over the next 36 months you'd each receive $37.50 or $135,000 Since the $75 payment represents “interest only” there would still be $5000 due at the end of 3 years. Each of you would get $2500. Your investors would be receiving a total of $3850 for his $2000 investment. You'd be receiving a total of $5850 for your $350 investment. Not bad.
