87% ROI in 18 Months

[Don Konipol]

I rarely post results of my investments, but this one worked out so perfectly, and provides a powerful example of the profitability of notes.

One and one half years ago I was asked to finance a barely operating club/restaurant in a Chicago suburb. The situation was that the owner occupant had run out of capital, his backers withdrew, and his past operating loses eliminated convention financing.

The owner claimed that the property was worth $900,000, and he had an experience operator ready to purchase the business and real estate for $800,000. I asked for the buyer’s contact information.

Speaking with the buyer, I learned two things. First the property was worth $550,000, not $900,000 (he possessed a recent appraisal), and second he was willing to pay no more than $475,000. He intended to refurbish the property and add it to his four location chain of neighborhood sports bars.

The owner informed me that he hadn’t paid a note payment in almost one year, and beside a first lien had an SBA second. The first lien amount owing was $325,000, the SBA second balance was $475000.

Without going into why I did what I did I’ll just relay the facts. I purchased the bank loan, balance $325,000 for $199,750. The interest rate was at the default rate of 12%, so my monthly payments would be about $3200. I arranged for the owner to lease the property to the buyer for exactly the note payment to me, and I would ACH funds directly on a monthly basis. The buyer has a two year option to purchase the property for $475,000.

I then contacted the owners backers who were personally liable on both the note I now owned and the SBA loan. They agreed that if I could negotiate the SBA debt down to $250,000, and release them from liability on my note, they’d make up the difference in a property sale.

We were able to negotiate the SBA debt to $240,000. The sale of the property to the tenant buyer was somewhat delayed because he was obtaining a new SBA loan, and the Government shutdown. The transaction closed yesterday. The sellers had to come to closing with about $110,000 cash which released them from all liability.

So how did my investment fare? Well, I paid about $200,000 for the note. I collected $3200 monthly interest for 18 months. And I received principal of $325,000 at closing. So on a $200,000 investment I received back $377,600, a profit of $177,600 in 18 months, or 88%. Not bad!

The vast majority of my deals are nowhere near as good. But every once in a while......

[Chris Seveney]

That is what is great about the note business, you will have a lot of singles and doubles and once and a while you hit a grand slam like that. If you do your due diligence its also rare to strike out on a deal, happens but not very often compared to the base hits you get.