Dave Knudson, Gravity Capital. Today, I would like to talk to you about what you think is one of the biggest problems about lending, and that is when you get a borrower that doesn’t want to pay you. 

Which brings me to one of our hardest properties that we’ve ever had to collect on. This is a property in Mentor, Ohio. A guy by the name of Joe came to us and wanted to borrow $255,000. As usual, we went through all of our checks and balances to find out what we think the property was worth. County had it listed at 414, we had some comparable properties that indicated that it was maybe worth $635,000. We had a broker who said he thought it’s worth was $530,000. We zeroed in after looking at all of these and we thought the value was $550,000. Because of that, we decided to lend Joe $255,000. Now out of that, we charge 10% upfront. So we took $25,000 dollars roughly for points, and we funded to Joe $230,000.  Joe paid an interest of 18% and he was to make monthly interest only payments for one year and then at the end of the year he was going to pay us off.

Joe after six months made us about $26,000 in payments. Then he gave us the bird and said, “I don’t care what you guys do, I’m not gonna pay any more,” and he didn’t. We waited for Joe to decide what he wanted to do, in fact , we ended up waiting for a year and a half. And through that year and a half we have built into a note, a default rate. The default rate was 24% interest which means, once Joe decides to stop making payments, we can charge now 24% interest, which we did. 

The other thing Joe didn’t know, well, he knew about, but the other thing that we put in these loans is a late fee. So, everytime Joe was late on making a payment, we would charge an extra 10%. And including when the loan came due a year, a year after we made the loan, he also had another 10% fee that he had to pay, because he didn’t pay off.

So, Joe didn’t make payments, told us to jump in the lake, and what we ended up doing was having to start foreclosure. Now keep in mind, all I did was wait for Joe. We hired an attorney, the attorneys did the foreclosure, we patiently waited for the attorney to foreclose. And at the foreclosure sale, two days before the foreclosure sale, we sold the property and ended up getting $407,000. Two days before the foreclosure sale. This one happened to come from a guy who had a second mortgage, so Joe had talked to somebody else into lending him another five to eight hundred thousand dollars behind us, and that guy ended up paying us off. Even if he wouldn’t, we would have gotten in the foreclosure sale and would have sold it for that, because we still believed it was worth somewhere in this range.  

So let’s look at how this loan turned out. We lended basically $230,000, we got $407,000, of that, $34,000 were late fees, $32,000 of that were extra default interest rate. At the end, we turned out getting a 41% returned annualized over two years, that means over two years, each year we got a 41% return. 

All we did was wait for Joe. So these hard collecting loans, let me tell you, are without a doubt, the best loans. Dave Knudson, Gravity Capital.

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