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Getting a Payoff
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THE SCENARIO
A couple of years ago, my friend (Billy) was looking to loan out some money and earn some interest.
There was a note investor (Trina) who found a mortgage note that wasn't being paid. Trina figured she could buy that note at a deep discount since the payments weren't being made, and she felt safe doing so because it was secured to good collateral (a house). Trina figured if she could work with the people in the house and get them paying again then she could make a good profit. However, Trina didn't didn't have the money to buy the note, so she borrowed the money from a friend of mine (Billy).
Trina worked with the people in the house, but instead of making payments again they just gave up the house (relinquished the deed to Trina). Trina found a new buyer and sold the house "on terms", meaning that she took a down payment and then monthly payments rather than taking a lump sum for the house at the close of escrow. This is generally referred to as originating a "seller carry-back note", because the seller (Trina) is carrying back a note from which she expects to receive payments over time.
A few months later, the people who bought the house on terms borrowed money a bank to refinance the house, paying off Trina (who then paid off Billy with the proceeds).
The question: Billy gave Trina $30,000 to buy the note, and two years later, Trina gave Billy back $40,208.16. Assuming that Billy didn't get any of the down payment money or any of the monthly payments the buyer made, what was Billy's return?
THE SOLUTION
First things first, make sure the calculator is using 12 Payments per Year.
N: 24 (Billy got his return two years after making the investment)
I/YR: (This is what I'm trying to find)
PV: -30,000 (Billy gave Trina $30K)
PMT: 0 (We're assuming Billy got no money before the final payoff)
FV: 40,208.16 (Trina gave Billy back $40,208.16)
Billy made 14.73% on his investment.
There were some bumps in the road along the way, but in the end, Billy's return was pretty respectable (and he did, in fact, receive a few payments from the buyer before the eventual payoff). What do you think? Would you be willing to lend money to Trina to buy notes? If so, do you know someone like her in your area? If not, why not? Let us know in the comments!
