Adventures in Note Land #3

Note: You can use any financial calculator to do this problem, but if you want the BEST, you can get our 10bii Financial Calculator for iOS, Android, Mac, and Windows!

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.