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NMLS/MLO #355855

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How a Re-Performing Trust Deed Got That Way
Investors purchasing re-performing 2nd trust deeds have an opportunity to reap outstanding returns. The actual return will depend on the purchase price of the note they buy and any discount to the unpaid balance. Here is a real life example. (The names of the borrowers and their addresses have been excluded to protect their identities and dollar amounts have been rounded.)

Northwest Dallas Home

The Individual Investor’s Opportunity

This beautiful 4 bedroom/3 bathroom 3,517 square foot home in Northwest Dallas, Texas had a 2nd trust deed in default. The 1st loan was performing and had never been in default.

 

On September 1, 2014 the non-performing 2nd trust deed was purchased by a specialty real estate fund from a large hedge fund at a huge discount to the unpaid balance of $120,757.  After reviewing the borrowers financials, the reason the borrower defaulted and what has changed since, the specialty fund negotiated with the borrower to agree to pay the balance due as follows:

  • the interest rate on the 2nd loan was reduced from 14.67% to 6%;
  • the term of the loan was extended to 30 years (360 payments); and
  • that reduced the monthly payments from $1,462 to $724 to make them affordable for the borrowers.

 

A year later, on September 1, 2015, the specialty fund sold the modified, re-performing loan to an individual investor for $75,596, a 37.38% discount on the then current unpaid balance of  $120,716.

Investor Purchase

The 37.38% discount to the unpaid balance enabled the investor to earn a monthly income of $724, or $8,688 per year, for an annual return of 11.5% for the next 346 months (29 years).

Investor’s 2nd Trust Deed Return

If the note is held for the entire term of 346 months, or 29 years, the investor will get a total return of $250,504 (or 331.37%) on their original $75,596 investment.


  • $724 per month payments X 346 payments = $250,504 total return

  • $250,504 total return/$75,596 investment = 331.37%


 

Notice nothing changed for the borrower!


At $724 per month the homeowner/borrower is only paying 6% on the unpaid balance of $120,716.

Borrower’s 2nd Trust Deed Payment

The difference between the 6% and 11.5% return is due to the discounted price paid by the investor for the unpaid balance. Had the investor paid  $120,716 for the loan, or 100% or the unpaid balance, they would have earned a return of 6%, the amount of the interest on the modified loan.

Earning Even Higher Returns!

Most investors would be more than happy earning an 11.5% return on their investments as in this example. However, discounted notes offer the opportunity for even greater returns if the note is paid off early because the house is sold or the loans are refinanced.

 

The modified note on the Northwest Dallas house was sold to the investor on September 1, 2015 with a term of 360 months or 30 years. It’s likely the homeowners will sell before then. If the note is paid off early the 2nd trust deed investor will get paid the entire remaining unpaid balance of the loan, not just what they paid for it. 

 

For example, suppose the homeowners/borrowers sell their home on September 1, 2016 (2 years after the loan was modified and 1 year after the individual investor purchased it from the specialty fund).

 

The unpaid balance at that time would be reduced to $117,700. Because the individual investor bought the loan on September 1, 2015 they would already have received 12 monthly payments of $724 in principal and interest, or $8,688.  The total of the unpaid balance plus the payments received at close of escrow on September 1, 2016 would be $126,388. Based on the investors purchase price of $75,596 the investor’s 1-year profit would be $50,792 or a return of 167%!

Example of Early Loan Payoff


Regardless of if or when the home sells, the investor is getting their 11.5% annual return!

 

Getting Started

This is just one example of how an investor can succeed in trust deed investing. Each note and trust deed is unique so returns will vary. If you want to know more or get started in trust deed investing, Real Property Advisors can help. We will help you find and analyze promissory notes for sale and help perform the necessary due diligence to avoid any costly mistakes. 


Disclosure.The information contained herein is for informational and educational purposes only and does not constitute an offer or solicitation to buy or subscribe for any securities, nor should it or any part of it form the basis of, or be relied on in any connection with, any contract or commitment whatsoever. The information herein does not constitute legal, accounting, tax or investment advice; such advice should be obtained from a competent professional authorized to provide such advice.