How To Have Your Cake and Eat It Too

Mamma always said you couldn't have your cake and eat it too. Turns out, we can. At AJA Realty Investments, we buy non-performing notes. What does that mean? It means a borrower isn't paying for their mortgage note. Sometimes these properties are vacant and we offer a way out of the debt without destroying the borrowers credit. However, what do we do when the property is occupied? Mr and Mrs Smith have been paying on their note for over 12 years and this isn't just a house to them, but their home. It would take a cold heart to foreclose on these people.

But we like these kind of notes. Why? This is when we get to have our cake and eat it too. When we underwrite these deals, the first thing we look at is their P&I (Prinicipal and Interest) payment. Is it still affordable or are they underwater? Maybe they have a story to tell. Mr Smith lost his job 18 months ago because the factory closed down, maybe their son or daughter had to have a medical treatment. There could be any number of reasons, but once they got behind on their payments, they couldn't catch up. Then comes the months of collector calls and letters threatening foreclosure. This is where we can help. Here is an example.

Mr and Mrs Smith at 123 Holly Lane, Anytown, USA.

They purchased their home for $80,000 in 2003. After the crash of 2008, their property value had fallen year after year. They have been paying their note for 12 years, but they still do not have any equity. Their property was last valued at $21,000. There is a chance that we can buy the note for $5,500, so we place our offer and it gets accepted. After a week of due diligence to check other factors, we fund the deal and we are now the proud owners of a defaulted mortgage note that hasn't been paid on in 18 months. Now what?

The first thing we do is contact Polaris, which is a non-profit borrower outreach program. They will contact the borrower and let them know that we want to work something out with them. We know their P&I payment is around $500 a month, but that was for a property assessed at $80,000. What if we could cut their payment in half and start forgiving arrears and bad debt? We could easily modify their note and bring it in-line with the current value of $21,000 and get a payment of $250 per month. Let's say with our purchase price of $5,500 and some due diligence fees and other paperwork, we are into this note for $8,000. Well at $250 per month, we are making close to a 37.5% return. Yes, 37.5%. If you are happy with a 10% return, then you'll be ecstatic with a 37.5% return. But wait, there's more.


Turns out this note was originated at a bank back in 2003. Mr and Mrs Smith have a FICO of 575. If this couple makes three consecutive on-time payments, they may qualify for a FHA 10-23 refinance. What does this mean? It means the FHA will refinance this modified note at 95% of Fair Market Value. That's $19,950. Plus we have collected at least three months of payments ($750), which brings our total to $20,700. The return on that is 158%. If you need help with the math, that's $20,700 in refi and payments, minus the initial cost of $8,000 for a profit of $12,700. Our return on that profit is 158%. So we just made a killing, and the Smiths still have their home, paying half of their prior P&I and they even have equity now.

So who says you can't have your cake and eat it too. Everyone is very happy in this story, but who the happiest is will never be known. How happy would you be?

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