In todays email:

• 💬 State of the market: Rates, house prices, vacancy and inventory.

• 😉 Full Cycle: Example of a note purchase to home sell. We explore note acquisition, workout, and disposition.

State of Real Estate

• Interest rates have dropped pretty dramatically in the past week or so. The graph shows 6.95% through Dec 14. However, rates have continued to decrease. Not sure if this is enough to get people out buying houses again since the prices remain elevated.

• Median home prices across US have come down somewhat to around $431,000 in Q3 2023. Not all areas have seen this reduction and in fact some areas are still seeing increases (all real estate is local).

• The rental vacancy rates for Q3 2023 are ticking slightly higher to 6.6% (Q2 2023 was 6.3%). This will probably increase slightly more as many new apartments are coming online.

• The housing inventory (days on market) seems to be leveling off at round 52. Again the inventory is staying stubbornly low since everyone staying in their current home.

Full Cycle - Note Purchase to Home Sell 

Many times note investors do not see the whole picture in the note business. So I wanted to show a detailed example of the entire process from note purchase to foreclosure to selling the house with owner financing.

Note Acquistion

Early 2023, I purchased some non-performing loans (NPLs) which were all Home Equity Conversion Mortgages also know as HECM loan. It is more commonly referred to as a “reverse mortgage” as discussed in prior newsletters.

I want to focus on just one that recently went full cycle. Full cycle includes note acquisition, workout, and disposition. This was a nice house in a nice neighborhood (with poor curb appeal…lol 🤣…need to cut those bushes).

Note Workout

I purchased the debt on the property (i.e. the mortgage note) and all borrowers were deceased and were 2-3 years delinquent and none of the family members had any interest in keeping the property.

So what happens when the property goes to the foreclosure auction sale? Either the property reverts back to the lender as an REO (Real Estate Owned) or a 3rd party investor buys the property for the opening bid or higher.

The property did not have any interested bidders at auction sale. Therefore, we got the property back at foreclosure auction as lender (called REO - Real Estate Owned).

Note Disposition

Now I own the property and have 5 choices:

1. Sale property as-is for cash.

2. Sale property after rehab for cash.

3. Sale property with owner finance as-is.

4. Sale property with owner finance after light rehab.

5. Lease or lease option the property.

We decided to do light rehab and then sell with owner financing. Why?

1. Sale property as-is for cash. Since there is no value add, the returns are much lower and we get wholesale pricing.

2. Sale property after rehab for cash. This is the second most desirable outcome. However, a ton of work for a one time payout.

3. Sale property with owner finance as-is. This does not maximizing returns since most buyers want the property to be move-in condition. Selling as-is is much tougher and takes longer to find a buyer.

4. Sale property with owner finance after light rehab. This is my favorite, even though it takes effort to rehab the house. The one time effort to rehab pays dividends for future years of hassle free passive income.

5. Lease or lease option the property. I did not want a long distance rental. I have long distance rentals in my portfolio but these seem to be the biggest hassle with the lowest returns.

The Math

Note Acquistion Price: $87,000 on November 7, 2022

Note Workout Cost:  $19,000 (see details below). Property reverted back to me on April 21, 2023 as REO.

Legal: $2,900

Electrical: $1,600

Repairs: $6,100

Insurance: $700

Servicing: $500

Utilities: $700

Flooring: $6,500

Note All In Cost:   $106,000 ($87,000+$19,000)

Note Dispostion: $139,900. Sold with owner finance November 15, 2023 (see details below).

Price: $139,900

Down: $10,000

UPB: $129,900

Term: 15 years

PI: $1,313.67 for next 180 months!

IRR: 14.54%

Summary

If I sold the property outright my annual return would have been around 28% (or around $30,000 after 3% buyer agent commission). However, this is a one time deal ☹️. I would rather have a passive income of $1313.67/month for the next 15 years 😀. As I continue to repeat this process, my passive income continues to grow and yours can too!

We would love to get your feedback and your thoughts! Let us know which topics are of interest or where you need more clarity. Just respond to this email directly 😌 or email [email protected].