October 15, 2025 • 25 mins
In this episode, Chris breaks down one of the most misunderstood aspects of mortgage note investing—how to price non-performing loans correctly. Drawing from real case studies, he explains why assuming a fast foreclosure timeline can lead to major miscalculations, how borrower behavior (like filing for bankruptcy) impacts your timeline and return, and why the biggest risks often come from what you can’t predict.
Chris also shares how 7e models downside risk using IRR and scenario planning, why adding just one month to your assumptions can save your entire deal, and what to do when legal errors, borrower beliefs, or delays threaten your outcome. This episode is a must-listen for investors who want to move beyond surface-level deal sourcing and understand what it really takes to manage notes profitably.
This is part one of a multi-part series on loan pricing fundamentals.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:44):
Welcome back everybody toanother episode of the Paper Trail
podcast. I'm your host Chris70 of 7e Investments and if you are
looking for mortgage noteinvesting information and how to
buy non performing loans, doseller financing, get involved in
private lending, then you areat the right place. We here at the
(01:09):
Paper Trail want you to followthat paper trail and dive into the
details, the specifics on howto invest in this asset class. We
are not your typical let'sshow you how to market and only find
deals. We want to show you howto make money on deals. Today I am
(01:32):
going to be talking aboutpricing non performing loans and
how to value them for maximumreturns. And this is going to be
a multi part segment that I'mgoing to be talking on this topic
because there is a lot ofinformation that I want to provide
(01:52):
to investors. So sit back,enjoy, I got my cup of coffee, cream,
no sugar, the way I prefer andwe are going to dive right in. So
for those who have notlistened to me before, definitely
(02:13):
go back and listen where wetalk about the three P's analyzing
the person, the predicamentand the property. But as you get
experience and go through thedue diligence, you will see things
that start to be morecommonplace and patterns will prevail.
(02:37):
And like any type of investingor playing sports, which is, you
know, something I've done, youknow, a lot throughout my life, you
always, I'll use the term, areplaying the odds. And what do I mean
by that? What I mean by thatis looking at a situation, what are
(02:59):
some of the more common likelyscenarios and make sure you evaluate
them to see how they impactwhat you're doing, in this case your
investment. You might not beable to always base your pricing
entirely on a specificpredicament because you may never
win a bid, but you definitelywant to understand what could happen
(03:22):
in the risk. So we're going totalk today about some of those mistakes.
And the other reason I wantedto talk about this topic is I see
a ton of information out therenow talking about how to calculate
returns. Do you use irr, xirr,roi, cash on cash, all of these things.
(03:47):
And I'll tell you, yes, we useinternal rate of return for our investments
and we use it to a calculatewhat we anticipate on a return, but
also to evaluate scenarios.For example, if somebody's going
to give you $5,000 today or$10,000 in 16 months, which is better?
(04:10):
Good question. Way we wouldfigure that out is by irr, but not
going to dive that deep intothe Weeds on this session because
you're probably sitting in acar driving around or you know, listening
to this on a walk or howeveryou are listening. We are going to
(04:31):
just give you some of themistakes, how to avoid them and how
to make sure you're at leasttaking them into consideration if
they are unavoidable. Somistake number one we're going to
talk about is assuming a fastforeclosure in a non judicial state.
(04:55):
What does that mean? So let'srewind a little bit. If you're new
to note investing. There isjudicial and non judicial states.
A judicial state is where yougo through a foreclosure process
through the courts. You haveto file a lawsuit which is called
a complaint, and then getsummary judgment that allows then
(05:18):
the courts to file a sale withthe sheriff. And judicial states
can take a year, five years.Really depends on the state. We are
seeing judicial states, thosetimelines really starting to expand.
And I think they will continueto expand because even though we're
(05:39):
at all time lows forforeclosures, the media will make
it sound as if there's anuptick in trying to keep people in
their homes as fast aspossible. Non judicial states are.
There's a third party that istypically a law firm that is the
(06:01):
trustee that goes through theforeclosure process, that files basically
sends some documents and thennotifies it in the newspaper. And
this process can be done in,you know, three, four, five months.
So much quicker process. AndI'll actually share some case studies
(06:25):
today in regards to real lifesituations and scenarios where this
of course plays out. And I'llgive you an example. A borrower is
two years behind on theirmortgage. Prior lender didn't do
anything, just let them notpay. Property is worth $500,000 and
(06:47):
they owe 200,000. What I see alot of people with less experience
do is go in, buy that loan,assume that they're going to foreclose
in three to four months andmake a quick buck on that deal. Now
if you lived in a house that'sworth 500,000 and you couldn't make
(07:09):
your payments, you really havethree options. You can sell the house
on the open market and get themaximum value for it. You can let
it go to foreclosure and mostlikely would get about 70 cents on
a dollar, maybe less, or filebankruptcy, which allows you to restructure
(07:33):
your payments, keep yourequity and potentially keep your
house or it at least buys youanother year. What do you think borrowers
in these situations typicallytend to do. Typically they file bankruptcy.
That could turn a quickforeclosure into significant delays.
(08:00):
What also this may potentiallydo is increase carrying costs. It
will increase your legal costsbecause in bankruptcy you have to
file proof of claim, which isroughly $1,000 and go through that
process. Let's say even theborrower doesn't make any payments
(08:20):
in bankruptcy. I have twocases right now where this is occurring.
One in Texas where borrower isbehind, they believe there's equity
in the property. And againit's not also whether there is or
is an equity, it's what doesthe borrower believe? Because in
this instance there is noequity in the property. Actually
(08:41):
in both instances, I'm goingto talk about one in Virginia, one
in Texas, the borrowerbelieves there's equity and there
is not. Instead of letting itgo to foreclosure. In both instances,
they file bankruptcy. Theyfile bankruptcy and as part of the
(09:01):
bankruptcy they have to fillout all this paperwork, which we
actually like bankruptcybecause it's an open book where they
have to provide all thisinformation. But it takes time. And
then the courts will schedulea hearing. Then the bar has to continue
to submit its information andthe borrower during this time is
(09:21):
supposed to be paying, butwe'll see if they do or don't. And
then they have a hearing toget the bankruptcy approved. Once
the bankruptcy is approved,then the courts can start issuing
the payments. But you can'tforeclose. There is a stay meaning
they can't foreclose. And it'sas if the loan is brought current.
(09:45):
So even if the borrower stopspaying in bankruptcy, you typically
still have to wait 90 to 120days that they're behind again. And
then you file a motion forrelief and get a motion for relief
which is take, pulls it out ofbankruptcy. But that could take another
60 days. Long story short, ifa borrower files bankruptcy, assume
(10:09):
it's going to take a year. Nowhow do you predict all of this? You
can't. You can again use somecommon sense to understand what they
may or may not do. And let megive you some ideas what we do. We
(10:29):
look at what will happen inthe possibility of bankruptcy and
evaluate what those returnswill look like. If the borrower is
really behind and they startedmaking payments, maybe it's not a
bad. It's still maybe not abad deal. If the borrower is six
months behind at a lowinterest rate and they file bankruptcy,
(10:50):
that can really impact yourreturns. So here are some of the
things we also do within ourcalculator or when we analyze these
is in Texas. If I look attimelines it might say 90 days. Well
(11:11):
we typically will add a monthto that time frame. Why do we add
a month? Because think aboutdriving on a highway. I've lived
in Boston and D.C. two of theworst traffic places in the planet.
You know you can get, I canget to DCA airport in no truck. I
(11:33):
can actually be leave myhouse, get to the airport and be
through the gate in under 20minutes at 4:00am in the morning
because I'm about eight milesaway now. If I did that at 9:00 clock
in the morning, how long doyou think it would take me? An hour
(11:54):
would take you longer. There'sdelays, there's things that outside
forces that you don't controlthat can impact your foreclosure.
What are some of those forces?Your attorney filing, the proper
documentation, your servicergetting you the information so you
can get it to the attorney andthen things can happen. We've had
(12:17):
an attorney on two occasionsin non judicial screw up the publishing
twice. We were supposed tohave a foreclosure this past July.
We had to cancel it in Julybecause they screwed up. It pushed
it three or four weeks. Then Ithink beginning of August they screwed
it up again. What can you do?Can yell at them, you can scream
(12:38):
at them but doesn't make youfeel any better. It's not like can
go back to them say hey now myIRR is hurt because I'm carrying
this loan longer and they'regoing to reimburse you for it. That
stuff happens. So we willtypically add an extra month to the
process, some on longerforeclosures. If it's a 15 month
(13:00):
in timelines we might add twomonths but we do not anticipate the
shortest duration or theperfect path. The reality is if it
happens then great, you dobetter. If it doesn't, you got some
downside risk and it'sweighing in how much you can factor
in. Factor in a year, forgetit because you're never going to
(13:22):
win a bid because your numberis going to become too low. So it's
that balance of that gray areawhich nobody ever wants to talk about,
you know in note investingeveryone wants to tell you how to
market, how to go on LinkedInand find leads or call banks and
all this BS which you knowthat's not the part of node investing.
(13:42):
Anybody can do that. It's thegray area of pricing loans, managing
loans. You know if this thenthat, that nobody talks about except
us, I believe, because weexperience this every day. We're
actually in the business ofdoing this. Okay, sorry for that
little rant. So this gray areaof fine tuning, now there's another
(14:08):
avenue that we also look atwhen we're going down this path.
What if you take a propertyback that fast, foreclosure that
you thought, oh, I'm going toforeclose and it's going to sell
at auction? What if itdoesn't? Now you have to continue
carry insurance, continue topay the taxes. You might have to
(14:29):
file eviction. You have towait for the courts to actually issue
the deed, which can take amonth so you actually have ownership.
Because at foreclosure saleyou might win the bid, but you still
have to wait for the deed tobe transferred to your name. You
have carrying costs which canget pretty extensive. It's another
(14:50):
thing we factor into ourpricing. We carry three or six months
on every foreclosure. Even ifwe think it's going to sell at auction,
we will analyze it as if itsells at auction. Then we'll analyze
it at three and six months ofhold time. See how do those numbers
factor in? You know, is it abig difference in the numbers based
(15:12):
off of those hold times?Something important to consider.
Sometimes we might not carryany. Sometimes we carry six months,
sometimes we carry threemonths. That's the whole basis of
bidding is you just don'tclick a button or put it in and spit
out a number. You need toanalyze. It's no different than if
you owned a rental property.And how would it look if you got
(15:33):
1100 bucks a month in rentversus 900? You know, that will have
a significant impact on yournumbers. Note investing. You know
what the payment is. What youdon't know is your costs or your
time. So you have to factor inhow do those impact your returns?
And this is where again, IRRcan come into play because are you
(15:55):
better off? For example, wejust gave somebody $1500 cash for
keys versus holding outanother two months for an eviction.
Because $1500 today is a lotcheaper than holding a property for
two months. All the carryingcosts, the taxes, insurance, utilities.
(16:15):
So this is the avenues that Iwant people to open their brain and
think about of all thesesituations. Because as I mentioned,
carrying costs and legal feescan destroy those returns. So in
this one in Texas, we boughtthis loan last year and we anticipated
(16:38):
it would be a four monthforeclosure. And basically we put
a six month hold period andwe've actually gone by Those past,
those 10 months already thatwe anticipated in there. We do have
a foreclosure date coming up.Finally, because the borrower filed
bankruptcy, it got dismissed.So in this instance, you know, we're
(16:59):
past our timeline. Does itmean we're going to make less? It's
going to boil down to,honestly, you know, what the property
sells for. We're not going tolose money because we bought it at
a discount. But are we goingto make what we make? Maybe, maybe
not. And then if we do take itback, we then do a whole another
(17:22):
analogy of do we do work on itto increase value? Does that hold
time and increase work give usa better return than it doesn't?
We did a case study on aproperty in Nevada that we sold for.
We took it back and we couldonly sell it for between 1 to 1.2
million. We took it back, but$250,000 roughly into it and it sold
(17:44):
for around 1.9 million. Thatinstance, yes, we won. Other instances,
it's better to fish, you know,it's better to cut that bait. Southern
asset we have in Virginia,borrowers trying to sell it as well
and also started theforeclosure process. Interestingly,
(18:06):
the borrower is underwater.They believe there's equity in the
property, which they, I guessI should reframe that they can't
add because they mentionedthey could sell it for X, but then
they mentioned they owe us Yand they owe somebody else Z, and
(18:27):
Y plus Z is greater than X.But for some reason they think that
they can come out whole onthis. So they file bankruptcy to
try and protect. Whichunfortunately what happens many of
these instances too is again,the clock doesn't stop. So they still
owe money, it's still accruinginterest and it's still accruing
(18:49):
taxes and insurance. So thecosts continue to rise. And in many
instances these borrowersdon't understand that if I could
sell a Property Today For400,000 or in six months for 420,
the 420 probably isn't abetter answer because it's probably
accrued more than $20,000 incost during that time. So this is
(19:11):
another avenue of justunderstanding. But also remember,
there's common sense, but itdoesn't matter what you think the
property is worth. It alsodepends on what the borrower thinks
the property is worth. So inthis asset in Virginia, you know,
we bought it, I think in Apriland we assume that we'd be able to
(19:35):
exit this in 10 plus months,which is January, we're recording
this now in September, we areactually in the process of filing
motion for relief from stay toallow the property to be sold and
we'll see if we hit thattimeline. Now you may be thinking,
Chris, well, you're puttingthese in and you're not hitting them.
(20:00):
You know, is it, does thishappen all the time? No, in some
instances we get it sold infour months and we, you know, that
six months of carrying costsand everything else ends up winning
for us and does better. Theother aspect or thing that we also
do put in our numbers is if aproperty is worth it. I'm just going
(20:21):
to use easy numbers. A milliondollars or we think it's worth a
million. We, you know, in ouranalysis do not calculate that we
would receive the fullmillion. We discount that number
5 to 10%. We also includecosts as if we were to sell that
with an agent and we typicallycarry about another 10%. So $1 million
(20:43):
property, we might discount itto about 850,000. Why do we do that?
Because again, it providessome downside risk if the property,
you know, doesn't, isn't notworth it. And let's say a property
was worth 975. Great. Propertywas worth 975. And let's say we're
able to sell it with an agentat 4% now there's an extra 50,000.
(21:07):
So at 925 we're still winning.And that's another avenue where in
that instance we typically dovery well on our analysis. I'd say
we do very well on analysis inevery situation. But we put in our
analysis, you know, thesedownside risk measures. Again, extended
(21:29):
time, extended carrying cost,discounted pricing. So when you carry
all of these items in yourpricing, and I'm just going to use
a very simple example, I'mgoing to say $100,000 loan and non
judicial, let's say it's soldfor 75 cents on $75000. If you were
(21:55):
going to get out of that loanin four months and spend $5,000 on
legal, you're in it for 80 andit sells for 100 grand. Great. You
made 25% and four to sixmonths, which is 50% annualized.
That is really good. Let's sayit extends, goes past the year and
(22:21):
let's say it took a full year.And because you foreclosed and had
to take it back. So not onlydid you spend 5,000 on foreclosure,
you had 5,000 in holdingcosts. Now you're in it for 85,000.
Let's say it even sold at100,000 after a year. Now you just
made 15 grand in a year, whichis a 15% return. Big difference.
(22:43):
Still making money. Now let'ssay, you know, it had to pay realtor
commissions and fees andeverything else, then you only make
90 and you're in for 85. Seehow all of that compresses down,
down, down. Yeah, we learnedthat from the hard way seven, eight
years ago and making sure wefollow this process. But if it's
(23:07):
for now, if it's a hundredthousand dollar loan in our books,
we might value it at 85,000and carry a year to be in it. So
we're probably bidding maybe$60,000 for that asset and if we
get it, great. If we don't,we'll move on. But we understand
(23:27):
those costs in giving us theupside and playing, you know, making
sure we protect that downsiderisk. Far too often I see people
with the rosy colored glassesjust going through it and picking
out the perfect scenario thatcan occur, like driving down the
highway or going somewhere,you know, trying to get to the airport
(23:50):
30 minutes before you boardand only giving yourself 30 minutes.
You get stuck in traffic andget stuck at security. Too many things
can happen along the way. Andin note investing, you want to make
sure you account for thoseHope you enjoyed this episode of
the Paper Trail podcast. Asalways, leave us a like leave us
a review. We have our Facebookgroup. The Paper Trail can follow
(24:14):
us on LinkedIn. If you'reinterested in more information about
7e Investments, go to 7eInvestments.com. hope you enjoyed
this episode. We will continuetalking about some of these other
quote unquote mistakes that wesee. But until then, I will catch
you on the next one. Thank you all.
Welcome back everybody toanother episode of the Paper Trail
podcast. I'm your host Chris70 of 7e Investments and if you are
looking for mortgage noteinvesting information and how to
buy non performing loans, doseller financing, get involved in
private lending, then you areat the right place. We here at the
(01:09):
Paper Trail want you to followthat paper trail and dive into the
details, the specifics on howto invest in this asset class. We
are not your typical let'sshow you how to market and only find
deals. We want to show you howto make money on deals. Today I am
(01:32):
going to be talking aboutpricing non performing loans and
how to value them for maximumreturns. And this is going to be
a multi part segment that I'mgoing to be talking on this topic
because there is a lot ofinformation that I want to provide
(01:52):
to investors. So sit back,enjoy, I got my cup of coffee, cream,
no sugar, the way I prefer andwe are going to dive right in. So
for those who have notlistened to me before, definitely
(02:13):
go back and listen where wetalk about the three P's analyzing
the person, the predicamentand the property. But as you get
experience and go through thedue diligence, you will see things
that start to be morecommonplace and patterns will prevail.
(02:37):
And like any type of investingor playing sports, which is, you
know, something I've done, youknow, a lot throughout my life, you
always, I'll use the term, areplaying the odds. And what do I mean
by that? What I mean by thatis looking at a situation, what are
(02:59):
some of the more common likelyscenarios and make sure you evaluate
them to see how they impactwhat you're doing, in this case your
investment. You might not beable to always base your pricing
entirely on a specificpredicament because you may never
win a bid, but you definitelywant to understand what could happen
(03:22):
in the risk. So we're going totalk today about some of those mistakes.
And the other reason I wantedto talk about this topic is I see
a ton of information out therenow talking about how to calculate
returns. Do you use irr, xirr,roi, cash on cash, all of these things.
(03:47):
And I'll tell you, yes, we useinternal rate of return for our investments
and we use it to a calculatewhat we anticipate on a return, but
also to evaluate scenarios.For example, if somebody's going
to give you $5,000 today or$10,000 in 16 months, which is better?
(04:10):
Good question. Way we wouldfigure that out is by irr, but not
going to dive that deep intothe Weeds on this session because
you're probably sitting in acar driving around or you know, listening
to this on a walk or howeveryou are listening. We are going to
(04:31):
just give you some of themistakes, how to avoid them and how
to make sure you're at leasttaking them into consideration if
they are unavoidable. Somistake number one we're going to
talk about is assuming a fastforeclosure in a non judicial state.
(04:55):
What does that mean? So let'srewind a little bit. If you're new
to note investing. There isjudicial and non judicial states.
A judicial state is where yougo through a foreclosure process
through the courts. You haveto file a lawsuit which is called
a complaint, and then getsummary judgment that allows then
(05:18):
the courts to file a sale withthe sheriff. And judicial states
can take a year, five years.Really depends on the state. We are
seeing judicial states, thosetimelines really starting to expand.
And I think they will continueto expand because even though we're
(05:39):
at all time lows forforeclosures, the media will make
it sound as if there's anuptick in trying to keep people in
their homes as fast aspossible. Non judicial states are.
There's a third party that istypically a law firm that is the
(06:01):
trustee that goes through theforeclosure process, that files basically
sends some documents and thennotifies it in the newspaper. And
this process can be done in,you know, three, four, five months.
So much quicker process. AndI'll actually share some case studies
(06:25):
today in regards to real lifesituations and scenarios where this
of course plays out. And I'llgive you an example. A borrower is
two years behind on theirmortgage. Prior lender didn't do
anything, just let them notpay. Property is worth $500,000 and
(06:47):
they owe 200,000. What I see alot of people with less experience
do is go in, buy that loan,assume that they're going to foreclose
in three to four months andmake a quick buck on that deal. Now
if you lived in a house that'sworth 500,000 and you couldn't make
(07:09):
your payments, you really havethree options. You can sell the house
on the open market and get themaximum value for it. You can let
it go to foreclosure and mostlikely would get about 70 cents on
a dollar, maybe less, or filebankruptcy, which allows you to restructure
(07:33):
your payments, keep yourequity and potentially keep your
house or it at least buys youanother year. What do you think borrowers
in these situations typicallytend to do. Typically they file bankruptcy.
That could turn a quickforeclosure into significant delays.
(08:00):
What also this may potentiallydo is increase carrying costs. It
will increase your legal costsbecause in bankruptcy you have to
file proof of claim, which isroughly $1,000 and go through that
process. Let's say even theborrower doesn't make any payments
(08:20):
in bankruptcy. I have twocases right now where this is occurring.
One in Texas where borrower isbehind, they believe there's equity
in the property. And againit's not also whether there is or
is an equity, it's what doesthe borrower believe? Because in
this instance there is noequity in the property. Actually
(08:41):
in both instances, I'm goingto talk about one in Virginia, one
in Texas, the borrowerbelieves there's equity and there
is not. Instead of letting itgo to foreclosure. In both instances,
they file bankruptcy. Theyfile bankruptcy and as part of the
(09:01):
bankruptcy they have to fillout all this paperwork, which we
actually like bankruptcybecause it's an open book where they
have to provide all thisinformation. But it takes time. And
then the courts will schedulea hearing. Then the bar has to continue
to submit its information andthe borrower during this time is
(09:21):
supposed to be paying, butwe'll see if they do or don't. And
then they have a hearing toget the bankruptcy approved. Once
the bankruptcy is approved,then the courts can start issuing
the payments. But you can'tforeclose. There is a stay meaning
they can't foreclose. And it'sas if the loan is brought current.
(09:45):
So even if the borrower stopspaying in bankruptcy, you typically
still have to wait 90 to 120days that they're behind again. And
then you file a motion forrelief and get a motion for relief
which is take, pulls it out ofbankruptcy. But that could take another
60 days. Long story short, ifa borrower files bankruptcy, assume
(10:09):
it's going to take a year. Nowhow do you predict all of this? You
can't. You can again use somecommon sense to understand what they
may or may not do. And let megive you some ideas what we do. We
(10:29):
look at what will happen inthe possibility of bankruptcy and
evaluate what those returnswill look like. If the borrower is
really behind and they startedmaking payments, maybe it's not a
bad. It's still maybe not abad deal. If the borrower is six
months behind at a lowinterest rate and they file bankruptcy,
(10:50):
that can really impact yourreturns. So here are some of the
things we also do within ourcalculator or when we analyze these
is in Texas. If I look attimelines it might say 90 days. Well
(11:11):
we typically will add a monthto that time frame. Why do we add
a month? Because think aboutdriving on a highway. I've lived
in Boston and D.C. two of theworst traffic places in the planet.
You know you can get, I canget to DCA airport in no truck. I
(11:33):
can actually be leave myhouse, get to the airport and be
through the gate in under 20minutes at 4:00am in the morning
because I'm about eight milesaway now. If I did that at 9:00 clock
in the morning, how long doyou think it would take me? An hour
(11:54):
would take you longer. There'sdelays, there's things that outside
forces that you don't controlthat can impact your foreclosure.
What are some of those forces?Your attorney filing, the proper
documentation, your servicergetting you the information so you
can get it to the attorney andthen things can happen. We've had
(12:17):
an attorney on two occasionsin non judicial screw up the publishing
twice. We were supposed tohave a foreclosure this past July.
We had to cancel it in Julybecause they screwed up. It pushed
it three or four weeks. Then Ithink beginning of August they screwed
it up again. What can you do?Can yell at them, you can scream
(12:38):
at them but doesn't make youfeel any better. It's not like can
go back to them say hey now myIRR is hurt because I'm carrying
this loan longer and they'regoing to reimburse you for it. That
stuff happens. So we willtypically add an extra month to the
process, some on longerforeclosures. If it's a 15 month
(13:00):
in timelines we might add twomonths but we do not anticipate the
shortest duration or theperfect path. The reality is if it
happens then great, you dobetter. If it doesn't, you got some
downside risk and it'sweighing in how much you can factor
in. Factor in a year, forgetit because you're never going to
(13:22):
win a bid because your numberis going to become too low. So it's
that balance of that gray areawhich nobody ever wants to talk about,
you know in note investingeveryone wants to tell you how to
market, how to go on LinkedInand find leads or call banks and
all this BS which you knowthat's not the part of node investing.
(13:42):
Anybody can do that. It's thegray area of pricing loans, managing
loans. You know if this thenthat, that nobody talks about except
us, I believe, because weexperience this every day. We're
actually in the business ofdoing this. Okay, sorry for that
little rant. So this gray areaof fine tuning, now there's another
(14:08):
avenue that we also look atwhen we're going down this path.
What if you take a propertyback that fast, foreclosure that
you thought, oh, I'm going toforeclose and it's going to sell
at auction? What if itdoesn't? Now you have to continue
carry insurance, continue topay the taxes. You might have to
(14:29):
file eviction. You have towait for the courts to actually issue
the deed, which can take amonth so you actually have ownership.
Because at foreclosure saleyou might win the bid, but you still
have to wait for the deed tobe transferred to your name. You
have carrying costs which canget pretty extensive. It's another
(14:50):
thing we factor into ourpricing. We carry three or six months
on every foreclosure. Even ifwe think it's going to sell at auction,
we will analyze it as if itsells at auction. Then we'll analyze
it at three and six months ofhold time. See how do those numbers
factor in? You know, is it abig difference in the numbers based
(15:12):
off of those hold times?Something important to consider.
Sometimes we might not carryany. Sometimes we carry six months,
sometimes we carry threemonths. That's the whole basis of
bidding is you just don'tclick a button or put it in and spit
out a number. You need toanalyze. It's no different than if
you owned a rental property.And how would it look if you got
(15:33):
1100 bucks a month in rentversus 900? You know, that will have
a significant impact on yournumbers. Note investing. You know
what the payment is. What youdon't know is your costs or your
time. So you have to factor inhow do those impact your returns?
And this is where again, IRRcan come into play because are you
(15:55):
better off? For example, wejust gave somebody $1500 cash for
keys versus holding outanother two months for an eviction.
Because $1500 today is a lotcheaper than holding a property for
two months. All the carryingcosts, the taxes, insurance, utilities.
(16:15):
So this is the avenues that Iwant people to open their brain and
think about of all thesesituations. Because as I mentioned,
carrying costs and legal feescan destroy those returns. So in
this one in Texas, we boughtthis loan last year and we anticipated
(16:38):
it would be a four monthforeclosure. And basically we put
a six month hold period andwe've actually gone by Those past,
those 10 months already thatwe anticipated in there. We do have
a foreclosure date coming up.Finally, because the borrower filed
bankruptcy, it got dismissed.So in this instance, you know, we're
(16:59):
past our timeline. Does itmean we're going to make less? It's
going to boil down to,honestly, you know, what the property
sells for. We're not going tolose money because we bought it at
a discount. But are we goingto make what we make? Maybe, maybe
not. And then if we do take itback, we then do a whole another
(17:22):
analogy of do we do work on itto increase value? Does that hold
time and increase work give usa better return than it doesn't?
We did a case study on aproperty in Nevada that we sold for.
We took it back and we couldonly sell it for between 1 to 1.2
million. We took it back, but$250,000 roughly into it and it sold
(17:44):
for around 1.9 million. Thatinstance, yes, we won. Other instances,
it's better to fish, you know,it's better to cut that bait. Southern
asset we have in Virginia,borrowers trying to sell it as well
and also started theforeclosure process. Interestingly,
(18:06):
the borrower is underwater.They believe there's equity in the
property, which they, I guessI should reframe that they can't
add because they mentionedthey could sell it for X, but then
they mentioned they owe us Yand they owe somebody else Z, and
(18:27):
Y plus Z is greater than X.But for some reason they think that
they can come out whole onthis. So they file bankruptcy to
try and protect. Whichunfortunately what happens many of
these instances too is again,the clock doesn't stop. So they still
owe money, it's still accruinginterest and it's still accruing
(18:49):
taxes and insurance. So thecosts continue to rise. And in many
instances these borrowersdon't understand that if I could
sell a Property Today For400,000 or in six months for 420,
the 420 probably isn't abetter answer because it's probably
accrued more than $20,000 incost during that time. So this is
(19:11):
another avenue of justunderstanding. But also remember,
there's common sense, but itdoesn't matter what you think the
property is worth. It alsodepends on what the borrower thinks
the property is worth. So inthis asset in Virginia, you know,
we bought it, I think in Apriland we assume that we'd be able to
(19:35):
exit this in 10 plus months,which is January, we're recording
this now in September, we areactually in the process of filing
motion for relief from stay toallow the property to be sold and
we'll see if we hit thattimeline. Now you may be thinking,
Chris, well, you're puttingthese in and you're not hitting them.
(20:00):
You know, is it, does thishappen all the time? No, in some
instances we get it sold infour months and we, you know, that
six months of carrying costsand everything else ends up winning
for us and does better. Theother aspect or thing that we also
do put in our numbers is if aproperty is worth it. I'm just going
(20:21):
to use easy numbers. A milliondollars or we think it's worth a
million. We, you know, in ouranalysis do not calculate that we
would receive the fullmillion. We discount that number
5 to 10%. We also includecosts as if we were to sell that
with an agent and we typicallycarry about another 10%. So $1 million
(20:43):
property, we might discount itto about 850,000. Why do we do that?
Because again, it providessome downside risk if the property,
you know, doesn't, isn't notworth it. And let's say a property
was worth 975. Great. Propertywas worth 975. And let's say we're
able to sell it with an agentat 4% now there's an extra 50,000.
(21:07):
So at 925 we're still winning.And that's another avenue where in
that instance we typically dovery well on our analysis. I'd say
we do very well on analysis inevery situation. But we put in our
analysis, you know, thesedownside risk measures. Again, extended
(21:29):
time, extended carrying cost,discounted pricing. So when you carry
all of these items in yourpricing, and I'm just going to use
a very simple example, I'mgoing to say $100,000 loan and non
judicial, let's say it's soldfor 75 cents on $75000. If you were
(21:55):
going to get out of that loanin four months and spend $5,000 on
legal, you're in it for 80 andit sells for 100 grand. Great. You
made 25% and four to sixmonths, which is 50% annualized.
That is really good. Let's sayit extends, goes past the year and
(22:21):
let's say it took a full year.And because you foreclosed and had
to take it back. So not onlydid you spend 5,000 on foreclosure,
you had 5,000 in holdingcosts. Now you're in it for 85,000.
Let's say it even sold at100,000 after a year. Now you just
made 15 grand in a year, whichis a 15% return. Big difference.
(22:43):
Still making money. Now let'ssay, you know, it had to pay realtor
commissions and fees andeverything else, then you only make
90 and you're in for 85. Seehow all of that compresses down,
down, down. Yeah, we learnedthat from the hard way seven, eight
years ago and making sure wefollow this process. But if it's
(23:07):
for now, if it's a hundredthousand dollar loan in our books,
we might value it at 85,000and carry a year to be in it. So
we're probably bidding maybe$60,000 for that asset and if we
get it, great. If we don't,we'll move on. But we understand
(23:27):
those costs in giving us theupside and playing, you know, making
sure we protect that downsiderisk. Far too often I see people
with the rosy colored glassesjust going through it and picking
out the perfect scenario thatcan occur, like driving down the
highway or going somewhere,you know, trying to get to the airport
(23:50):
30 minutes before you boardand only giving yourself 30 minutes.
You get stuck in traffic andget stuck at security. Too many things
can happen along the way. Andin note investing, you want to make
sure you account for thoseHope you enjoyed this episode of
the Paper Trail podcast. Asalways, leave us a like leave us
a review. We have our Facebookgroup. The Paper Trail can follow
(24:14):
us on LinkedIn. If you'reinterested in more information about
7e Investments, go to 7eInvestments.com. hope you enjoyed
this episode. We will continuetalking about some of these other
quote unquote mistakes that wesee. But until then, I will catch
you on the next one. Thank you all.
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