NPN Story: Change the Date, Duh!
We don’t normally like to buy lower balance loans with lower value properties but we purchased this in a pool with other loans and the Memphis market was booming at the time. This started out as a sub-performing loan, turned into a re-performing loan, and turned out to be a nice little gem with a great return!
We don’t like to buy lower balance (less than $50,000) loans matched with lower value properties (less than $50,000) for a few reasons:
1. There are fixed costs that are completely independent of loan size that will significantly eat up your margins. Examples:
a. Foreclosure costs; a foreclosure in a certain state might cost $5,000. That number is the same for a $10,000 as well as a $500,000 loan.
b. Servicing costs; same thing: $75-$95 per month for up to $1 Million in UPB
c. Bankruptcy and other legal fees; unless you are representing yourself, the costs of making regular filings or having an attorney defend you in a lawsuit can add up quickly and are not dependent on the UPB.
d. Rehab costs; there’s a range depending on the geographic market and what type of property you’re dealing with. But, in general, a $20,000 low to mid level rehab would get you about the same result for properties in the $20,000 to $180,000 range.
2. Lower Value collateral generally means Lower Quality Asset
3. Lower Quality Asset means:
a. Less people want them. The less people that want them, the harder it is to sell.
b. Rural or remote properties; these take longer and are harder to sell
This note was part of a larger pool that we bought and the numbers actually looked pretty good. It was a sub-performing loan, which meant that the borrower was consistently 30–60 days behind in her payments. This justified the discounted price that we could get for it. Performing note buyers want to see at least 6 to 12 months of on time payments. Anything less and they’ll expect a discount or pass on the note.
Uh Oh, Off to a Bad Start
After servicing transferred to us, the borrower fell farther and farther behind and soon was 90+ days late. At 120 days late, we could start the foreclosure process.
This happened at the same time that we realized that calling our own borrowers directly was a good idea. (See this post to learn why we came to that conclusion.)
Contacting the Borrower Directly
We called up the borrower (let’s call her Ashley) and she said that she was going to borrow money from a friend so that she could reinstate the loan. It concerned us that she was borrowing from someone else to get caught up but, at the end of the day, that’s her choice to make and her responsibility to make good on that debt.
Sure enough, she reinstated the loan, paid all the back payments and was caught up again. Our hope was that she’d make 6 to 12 months of on time payments so we could sell the loan as a re-performer.
Ashley started making regular payments but they were consistently 2–3 weeks late. We called her to find out why. She said that she ran a hair salon but had to make sure she paid the rent on that space first. By the time she had enough money to pay her home mortgage, it was the middle of the month and her payment was late.
We had to respect that. Ashley was working and had to make sure her business could operate and generate income. She made the choice to pay her mortgage last, which makes sense in her situation. Ashley understood that her mortgage payment was less than what she would have to pay for rent if she lost the house. She was motivated to keep making payments.
We thought about her situation. She was living paycheck to paycheck but so do so many other Americans. The thing that was off for us was just a matter of timing. We needed on time payments and Ashley couldn’t make the payments until the middle of every month but she was doing that consistently.
The Easy Solution
Why didn’t we just change the due date from the 1st of the month to the 15th of the month? Duh, right? Seems so obvious, just change the due date but imagine trying to do that with one of the big banks. They just don’t care.
With this change, Ashley’s payments were not late any more and she stopped getting late fees. We received on time payments, which increased the value of our note! Win-win!
After 6 more on time payments, we sold the note for a really good return. Another solid deal in the books!
Why Not Get a Roommate, Part II?
SIDE NOTE: Ashley had a 3 bedroom, 1 bathroom, 1150 square foot home, with a loan payment a few hundred dollars a month less than rent for an equivalent property. If she was barely making ends meet, why didn’t she take on a roommate and reduce her financial stress? I brought up this topic in another story. Although Ashley was doing ok when we sold the loan, it makes sense to me to get a roommate to get extra income just in case.
Things I learned:
Be flexible in your thinking. If the borrower consistently performs to a certain level, make the easy change that costs you nothing or very little but benefits everyone.
Have empathy for those that are trying to make ends meet and are legitimately trying to pay their debts. It’s worth the extra effort to find a solution that could work.
Lower balance loans with lower valued properties can be a great investment; make sure that you have larger margins to make up for the risks or buy a lot of these types of notes to spread the risk.
Borrowers: If you’re barely getting by, consider getting a roommate to reduce your financial stress.
Purchase Price: $25,805
Total Cost Basis: $20,769
Net Sales Proceeds: $48,765
Net Profit: $27,996
Days Held: 427
Return on Investment (ROI): 134.8%
Annualized ROI: 115.2%