STRATEGY
NOTE INVESTING
Using the TimeValue of Money to IncreaseYour Profits in Note Investing A CASE STUDY DEMONSTRATES HOW TIME & MONEY RELATE.
return grows to 25.3 percent.
deal, which she split with her student. • Ivan, the note-buyer, earned $22,000 for purchasing the entire note and facilitating an accelerated payoff. • The borrower likely enjoyed refinancing at a lower interest rate. Conclusion: Everyone “won” in this deal.
by Bill Griesmer
ost real estate investors understand the importance of the return on investment (ROI) of a deal. However, they often overlook an important factor in ROI: time. Time has a monetary value, and it differs from investor to investor and strategy to strategy. In note investing, the faster you earn back your principal and earnings, the higher your ROI. Won- dering how to figure out the time value of money in your next deal? This case study should help. M
OPTION #2 SELL TO AN INSTITUTIONAL BUYER First, Sally and Bauer tried to sell the note to a large insti- tutional buyer; they agreed on a price of $108,090, subject to the borrower having excellent credit and a broker price opinion (BPO) indicating a property value of $150,000. This would have resulted in a quick $27,615 profit. True Life Results: Failed. The BPO came in low, which nullified the deal. OPTION #3 SELL TO A PRIVATE INVESTOR Sally and Bauer offered a private investor, we’ll call him “Ivan,” this note for $95,000. Though it was not as much profit as the institutional buyer offered, it still represented a $14,525 profit. Not bad! Ivan also stood to gain in this scenar- io: If the borrower could not pay off the balloon, Ivan would receive a 9.38 percent return. If the borrower did pay off the balloon, Ivan would enjoy a 17.16 percent return. Verdict: Very positive option for everyone. THE FINAL OUTCOME Surprise! Ivan was more than a passive investor. He worked in the mortgage industry and was able to help the borrower refinance before the balloon was due. In fact, Ivan helped the borrower to refinance just three months after he bought the note. This meant he bought the note for $95,000 and three months later received his full $117,000 payoff when the refinance closed. THE BREAKDOWN: • Bauer’s student, Sally, received the $80,425 purchase price she wanted for her note. • Bauer earned fee income of $14,525 for facilitating the
LOTS TO LIKE IN THIS DEAL There are lot of things to like about this note: • It is owner-occupied
• Secured by a deed of trust instead of a contract for deed Deeds of trust are usually easier to work with if there is a default and you need to foreclose. Make sure the document you are using as a security agreement is legal in the state in which you are investing. • The taxes are current. • It has a perfect pay history for 2.5 years which was veri- fied with bank statements. • The house is in excellent condition. • At this point, the loan-to-value (LTV) is only 78 percent, which is very reasonable. • It has a relatively high interest rate for a seller-financed note. • The borrower has an administrative position at the local hospital, a solid job. MULTIPLE ATTRACTIVE OPTIONS The current owner of the note, “Sally,” has several attractive options: OPTION #1 KEEP THE NOTE The key “X-factor” in that scenario is the balloon payment. Since the borrower had some minor credit issues, Sally might have difficulty getting financing, which could make it hard for her to pay off the balloon when it comes due. This could cause her to have to carry the rest of the note over the full term of 360 months. Verdict: Still Positive If that happened, Sally would still enjoy a nice 11.47 percent return. But if the balloon did pay off as written, the
HOWTHE TIME-VALUE FACTOR PLAYS IN Three months is the key metric here. Yes, Ivan earned “only” $22,000 in the deal, but he earned that in only three months. That equals a 96 percent annualized return on his investment!
THE DETAILS:
Term: 360 months with a full balloon after 60 months Interest Rate: 7% Monthly Payment: $ 805.02 Number of Payments Made: 32 Number of Payments Left (before balloon): 28 UPB: $ 117,521 Pay History: Perfect for 2.5 years, Direct Deposit
A FINAL NOTE ON THE TIME-VALUE RELATIONSHIP
Bauer emphasized this was a good deal for Ivan both because of the annualized return and because he keeps his funds ac- tively invested. “You don’t want to give up a nice [long-term] return to get the 96 percent annualized return unless you have another note to immediately invest in,” she warned. “I have seen investors give up 25 percent long-term to get 75 percent short-term, then stick the money they earned in a C.D. earning 2 percent. They have defeated the entire purpose of encourag- ing an early payoff to get phenomenal rates of return.” This case study demonstrates how an active note investor can intentionally work with a borrower to accelerate that time frame and increase his or her return. •
into Seller’s Bank Account Fair Market Value: $ 150K+ Occupancy: Owner Occupied Security Agreement: Deed of Trust Taxes: Current, per Seller and checked with County Auditor Purchase Price: $ 80,475
This case study and definitions are provided courtesy of Donna Bauer, private investor and founder of The Original NoteBuyer ® LLC. Donna and one of her students, “Sally,” purchased this note and flipped it to another investor. This article shows the thought process of evaluating and selling the note, as well as the end results.
Bill Griesmer is the Managing Member of Stonegate Capital, which buys and sells performing and distressed notes. He can be reached at bill@ stonegatecap.net. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
54 | think realty magazine :: december 2018
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