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THE SCENARIO

Working with a note broker, I find a note that I can purchase.  The terms of the note are as follows:

• Original term: 20 years (240 months)
• Amortizes fully
• Original amount borrowed: \$100,000
• Note purchase price: \$55,000
• Borrowing rate: 3.44% (after modification)
• Monthly payment: \$605.40 (after modification)
• Remaining payments: 196 at time of modification
• Number of payments made after modification: 14
• Value of collateral: \$75,000 (original value: \$125,000)
• Back payments forgiven as part of modification

Borrower has stopped paying again.

• Number of months since the last payment: 4

THE QUESTION

A) If you approve the short sale at a net-to-you price of \$65,000, and you get that money 5 months after their last payment, what would your total yield be?

B) If you approve a net-to-you price of \$60,000 instead, what would your total yield be?

C) If you want 11% yield on your money, would you approve a net-to-you price higher or lower than \$60,000?

THE SOLUTION

A) If you approve the short sale at a net-to-you price of \$65,000, and you get that money 5 months after their last payment, what would your total yield be?

Uneven:

-\$55,000 x 1

\$605.40 x 14

\$0 x 4

\$65,000 x 1

IRR/YR = 19.98%

Your total yield would be 19.98% if you approved this short sale.

B) If you approve a net-to-you price of \$60,000 instead, what would your total yield be?

Uneven:

-\$55,000 x 1

\$605.40 x 14

\$0 x 4

\$60,000 x 1

IRR/YR = 15.15%

Your yield would be 15.15%.

C) If you want 11% yield on your money, would you approve a net-to-you price higher or lower than \$60,000?

You could accept less money.

-\$55,000 x 1

\$605.40 x 14

\$0 x 4

??? x 1

Trial and error in using uneven cashflow analysis reveals that if you got \$56,000, you would make 11.01% on your money.  Whether or not you want to do this is up to you as the note holder.

Money Blog – Adventures in Note Land #3