RETIRE RICH With Your Self-Directed IRA by Nora Peterson

Author:Nora Peterson
Language: eng
Format: epub
Publisher: Atlantic Publishing
Published: 2013-05-27T00:00:00+00:00

Market value of property

$100,000

Loan balance

$64,000

LTV (loan-to-value ratio)

64%

Note discounted price (70% of balance)

$44,800

Profit Analysis

Jo’s Cost

$44,800

Selling price after foreclosure

$106,000

Interest income (1 year)

$3,411

Principal paydown (1 year)

$4,405

Total income

$113,816

Jo’s profit (total income less cost)

$69,019

Annualized ROI

154%

Of course, these figures do not account for the cost (and aggravation) of going through the foreclosure process and selling the property. However, even after covering those expenses, Jo will very likely be well compensated for her aggravation.

Outcome D: Jo Resells the Note

What if this homeowner turns out to be the exception to the rule? Perhaps the house is in the same neighborhood where he grew up, went to school, and married his wife. Maybe he can’t think of another place in the world where he’d rather live. He just might remain in the same house for 20 or 30 years.

After a few years of holding the note, Jo might become impatient waiting for him to sell the house so that she can collect the loan payoff. Or maybe she believes she bought the note at such a good price that she can turn it over in short order and capture a nice profit. Let’s consider how that scenario would pan out for Jo.

In the year since Jo bought the note, the value of the house has appreciated by $5,000, and the loan balance has decreased to $59,183. Together, that brings the LTV down to 56 percent, a drop of 8 percent since Jo purchased it. Remember that investors want an LTV below 75 percent, so when she puts it on the market, she quickly finds a buyer at a 25 percent discount off the loan balance.

When all is said and done, Jo receives $44,387 from the sale of the note and $7,816 from interest and principal payments from the 12 months she owned the note. Deducting the price she paid for the note, she returns a profit of $7,816, or 17.6 percent. That’s almost double the annualized return from holding onto the note for ten years—with a lot less risk.

Table 17. Resold Note Profit Analysis

Updated Note Value

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