The number one question is “how do I determine the price of a note”?
And let’s face it that is the most important part of note investing there is.
“I have been saying for years “there are no bad notes just bad pricing”
So let’s get to it.
Your Return on Investment
First and foremost you need to come to terms about what you are looking for in returns.
You Must Must Must have a finite number you are focusing on.
This is very similar to goal setting. I ask someone what their goal is for 2020 they said “more Money” I hand them a $10 they say what’s this I say More Money.
How It’s Done
So let me show you how to do this.
I am looking at a 2nd position note to purchase
In my due diligence I am looking at the value of the house, the first position note amount, the amount the 2nd is owed both the unpaid principal balance and the arrears, the borrowers ability to pay other debts, the period of time the borrower has lived at this address and now comes the fun part HOW MUCH DO I THINK IS RECOVERABLE!
Let’s Use Real Numbers
1. I want to make a 50% return
2. The purchase price is some percentage of the unpaid principal balance (never factor in the arrears)
3. Value of the home is $150,000
4. Balance of the 1st is $160,000 and it is current
5. Unpaid principal balance I am buying is $30,000
6. Borrower has a decent ability to handle current debt and has been living at that address for 14 years
7. I think I can recover $18,000 in the next 3 years
8. That looks like 6,000 per year
My offer then should be $4,214 I know I will do fine (I never use round numbers)
Don’t forget I am getting the arrears for free which I use as a bargaining chip upfront to get as much of my purchase price back as possible which will skyrocket my returns way past 50% but I never ever count on that when I am in purchase mode!