Posted by Sean on May 05, 1999 at 18:05:16:

Let’s say there’s a $100,000 house with an 80% first loan and a 10% second loan. The terms of the second loan is 120 months at 9.5% interest with payments of $129.40/month. This was a standard 80-10-10 loan where the guy put down 10%, got a bank loan for 80% and the seller carried the other 10 percent.

Based on these numbers you can put them in a calculator and work out the right amount.

PMT = 129.40 (that’s the amount of the payments)

FV = 0 (the loan will fully pay off in 120 payments)

n = 120 (120 payments)

i% = 36% (that’s the yield you want)

PV = Your calculator will solve for this.

In this case it’s $4,189.07 or about 42 cents on the dollar. That’s a pretty deep discount, but if they are that anxious to sell that thing they’ll probably find you’re the only buyer in town.

If you did this all day long and if one mortgage out of 4 defaults you’re still getting better than a 25% yield.