Ah, Notes and Foreclosure, the name of my new band. Ever wonder about foreclosing on a note?
Transcript: Hi this is Jeff Brown the “BawldGuy”. We’re going to continue talking about notes and today’s subject is going to be foreclosure. Now, when I use to teach note analysis back in the ’70′s and ’80′s I started every class with the same sentence: If your not happy thrilled to death, doing the happy feet dance at the thought of foreclosing on a note you’re looking to buy, don’t buy the note. It’s that simple, it’s got to be so secure that you’re very happy owning it and the thought of foreclosure shouldn’t scare you. Nobody ever wants to have foreclose, but it’s just part of being a note investor. You invest long enough and in enough notes, you will find yourself foreclosing. Now, let’s take a scenario through from beginning to end. You buy that $100,000 note we’ve been talking about, you paid 65 and for five years you’ve been getting paid. All of a sudden the payer on the note, the homeowner loses his job and stops paying, you have to foreclose. Here’s what happens, you got to find out first of all what’s the properties worth. You go to the local broker and he tell you, “The good news is that the property hasn’t gone down in value, but it’s about the same 125 grand that is was when you first did it five years earlier.” Okay, that’s good. Now, I’m going to tell you don’t put it on the market for 125, become the most popular guy in that neighborhood, sell it for 115. Add credits to the buyer, bring your selling cost up to 10%, you’re still going to net out about 103 or 4 grand. So far, so good. What if even after this bubble we just went through, what if property prices went down in that area another 25%? It could happen, don’t let anyone tell you it won’t because it could. Now, that means that the property would have gone down in value maybe to 94, 95 grand. Okay, that means you’re going to sell it. I’m going to tell you don’t sell it for 94, sell it for 90. Again, give all kinds of credits to the buyer because you want to sell it in six hours. Now, you’re going to net out maybe 79,78. Remember now, you paid 65 grand, you’re still good. Wait a minute, we haven’t counted the cost you’ve incurred getting to this day netting from escrow the sale of the house. Here’s what happens, you lost $5 or $6,000 in payments. You’ve had to pay $2 or $3,000 in foreclosing costs. Then, the broker told you in order to make the property pretty and have better curb appeal you need to spend another $5,000 making it that way. You’re out $12 or $13,000. What happens is you net 79, you sold it for 90, you take away that $13,000 and you are still over 65. Now, let’s review. You got $65,000 into it, you spent five years. The payments have totaled $52,500 and you’ve got more than $65,000 net after all the smoke cleared from the foreclosure. You’ve got your money back, we call that a win in notes. You got your money back and $52,500 in payments. Even with the foreclosure, in five years you put in 65, you got 52,500 back and over 65 back after dropping in value. We call that a win, you’re still good. Remember, I’m going to close with what I opened with: If the thought of foreclosure doesn’t just thrill you to the bone and get you doing the happy feet dance don’t buy the note, look for something else. This is Jeff Brown, the BawldGuy. Thanks for listening, I’ll be here next time and I hope you are too.