I have a firm conviction that most people would rather pay their bills than to default on their promised payments. The problem in many cases is that they have no financial insights to protect them from bad deals, or no self-discipline that will help them avoid them. Thus, they find themselves head over heels in debt because of credit cares. It’s hard to people with money to understand how critical the use of credit cards is for millions of people.
When confronted with the threat of having their credit cards cancelled in contrast to being foreclosed, many people opt to use their cash to keep credit card companies happy. This choice creates a lot of opportunity for someone who can restructure their debt.
In one instance, with brand new aluminum siding, roof, and shutters that made their house very attractive, the family had to pay $875 per month to the small loan company in addition to their regular $1215 first mortgage loan payments. Unable to do both, they stopped making their $31,000 small loan company payment. The entrepreneur was able to buy this loan that had been in default for 8 months. The small loan company didn’t want to foreclose because there had been a dispute over the quality of the workmanship that he didn’t want to explain to a judge; and it didn’t want to own the house and make $1215 payments. It sold the loan and all the delinquent back payments for $9,000 cash.
The entrepreneur approached the owners and through patient questioning determined that they could and would make payments of $400 if it could be worked out. With a fair amount of credit counseling and precautionary lecturing about the consequences of missing a payment, the delinquency was cured and payments restored as follows:
With a stroke of the pen, and without taking any more money out of either the borrowers’ or entrepreneur’s pockets, the $31,000 loan together with an additional $7000 in past due payments was refinanced with a new loan from the entrepreneur of $38,000 with 12% interest only payments of $380 per month. The loan was set to balloon in 4 years at which time the entire balance would become due and payable.
If the entrepreneur had kept the loan until full term, his return would have been truly astonishing, but he wanted to recycle his money back into the market. At the end of one year of on-time $380 payments during which time the house continued to appreciate, he offered his now-performing loan with $380 in monthly payments and a balloon payment of $38,000 to an investor for $26,000. His profit at the end of a year was $17,000 over what he’d paid for the loan, plus $4560 in monthly payments.
One final footnote: Because both the entrepreneur and the investor were not the loan originators, they were both holders in due course. Despite all the new laws about predatory lending, they were on high holy ground. Isn’t this the kind of deal a Roth IRA should be invested in?
