How much money will a lender lose during a foreclosure, and how can you evaluate it? What do the losses involve and what can be included? Use our online calculator to asses your potential losses and minimize them.
In This Article
Calculate your Foreclosure Risk of Loss
Use our Foreclosure Risk of Loss Calculator to find out what your potential losses are. The default values are from the example explained below.
Example of a $100,000 property foreclosed after the borrower stops making payments
Assume the property is worth $100,000 and you have loaned $75,000 against it at 7.5% per year, which is $524.41 per month over 30 years. The borrower stops making payments.
It costs you $1,800 to foreclose the loan in legal costs plus you have lost interest on your money for the 4 months it takes to foreclose the loan, thus 4 * $524.41 = $2,097.64.
You enter a 10% discount for the sale price and entered 7% to cover selling costs. On a $100,000 property, a 10% quick sale discount would take the sale price to $90,000. Based on this $90,000, sale costs of 7% make the approximate net after sales amount = $83,700.
How much have you gained or lost after selling the property?
Assume that you get the property back and sell it at a bargain price for a quick sale. In our example, you get only $83,700 after selling expenses for a property worth $100,000. Now how much have you lost?
You invested $75,000 (your mortgage) + $1,800 (legal expenses) + $2,097.64 (lost rent) + $1,000 (cleanup) + $200 (insurance) plus $2,000 (unpaid property taxes) = $82,097.64. So you end up with a small profit of $1,602.36. Not a lot but it beats a loss. Plus you have got 100% of your money back including lost interest and legal costs.
What if your LTV was more than 75%?
The situation changes if you have lent more against than 75% against the property, or it costs you more than $1,000 to clean it up and remove the trash. Try changing the amount of the loan to be $80,000 with the other options the same, and you will now make a loss of $3,537.49!
Summary
Remember, not EVERY mortgage will go into default. With at least a 10% cash down payments, past history has shown it is likely to be less than 1 in 20. But let’s be pessimistic and assume it is 1 in 10.
Assume you own 10 identical mortgages similar to those above. Let’s say that 1 in 10 go into foreclosure and on that one you end up losing 10% of the money you have invested. What has actually happened is that you have reduced your yield on your portfolio of 10 mortgages from 14% p.a. to 13% p.a. (Approximately). Is it still worth it? Is this as good or better than you would make in other investments?
Further Reading on Foreclosure:
- Foreclosure: What Private Lenders and Hard Money Lenders Need to Know
- Expert Guide to the Non-Judicial Foreclosure Process
- Expert Guide to the Judicial Foreclosure Process
- Why are Second Mortgage Foreclosures More Risky?
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