Readers often email me investments opportunities they are considering, asking for my opinion on the deal. I am always happy to help, and I usually learn something along the way.
In that vain, our company is currently offering a performing note that I think is a very good deal, and I thought some of you guys might want to hear about it. This house is actually on the first list that the readers helped us fund!
The asset is a performing note (mortgage) on the property 49540 Fuller, Chesterfield, MI 48051.
If I were buying this asset here are a few questions I would ask:
Why are we selling?
Answer: Our company is not in the business of holding notes long-term. We have a time frame with our investors of 1-2 years. Holding this note for 30 years is not really an option for us.
What is the interest rate and term of the note?
Answer: It is a 30 year note with a 10% interest rate. The monthly payment is fixed at $391.64. At the end of 30 years, your investment would return $141,000.
How long has the borrower been paying?
Answer: The original loan balance was $100,000 when the borrower went delinquent. We modified his loan to $45,000, and the borrower has made every payment for 14 months right on schedule.
What happens if the borrower stops paying?
If the borrower stops paying, you will have to foreclose on the property. We are serviced through a company called FCI, and if the buyer wanted to buy this note, FCI would seamlessly transfer the asset and manage it for $30/month. A foreclosure usually costs $2500 and takes 3-6 months. FCI can handle all of the work and it’s ridiculously easy for the note holder. After the foreclosure, the investor would get the asset. You would then have a realtor sell the property. Honestly, this would be a best case scenario in terms of profit.
What is the underlying asset worth?
You would have to do your own due diligence on that, but Zillow is saying $81,400. To be on the safe side, I think something like $60,000-$70,000 is reasonable. I quickly ran the comparable properties on the MLS. These are all of the sold properties within 20% of the square footage and within .5 miles.
The value of the underlying asset is extremely important in evaluating these type of deals. In a worst case scenario, you really need to make sure you make out better than if the borrower just made his payments to make up for the headache involved.
How much does the note cost?
We are selling the note at 80% of the current principle balance ($45,000). Which equals = $36,000. For this price, you would receive 391.64 every month for the next 30 years or the full balance if the borrower decides to pay off the balance. If the borrower decided to pay the entire loan amount off, you would receive a lump sum and be very happy (because you make an extra 20% right off the top).
In summary, the high interest rate and the strong underlying asset make this an attractive deal. It’s hard to envision a scenario where the investor doesn’t do very well. Essentially the investor is protected on all foreseeable avenues. This type of investment would be ideal for a self-directed IRA, where you could just check in in 30 years and see a big lump of cash.
Here is the ticker tape and some more information as well.
http://www.fciexchange.com/MICHIGAN/Residential/Performing/0010858.html
If you have any other questions about these types of deals or are interested in buying this note, please email me at JustinSadauskas@gmail.com. Thanks for reading.
justinsadauskas 