Best annualized ROI
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| Metric | 1. Reperform & Sell | 2. Foreclose & Resell | 3. Deed in Lieu | 4. Quick Note Resale |
|---|---|---|---|---|
| Total cash in | ||||
| Total cash out | ||||
| Net profit | ||||
| Total ROI | ||||
| Timeline (months) | ||||
| Annualized ROI |
Annualized ROI uses the simple compounding convention (1 + total ROI)^(12/months) − 1. The gold column is the best annualized return. Cash-flow timing within the period is ignored (see methodology).
Worked Example
Using the default inputs — a non-performing note bought for $45,000 with an $80,000 UPB (unpaid principal balance), a property worth $90,000 as-is, an 8% note rate, 200 months remaining, in Georgia — here is Scenario 2 (foreclosure & resale) walked end to end:
- Timeline. Georgia is a fast non-judicial state: an estimated 4 months to complete foreclosure, plus 4 months to market and sell the REO (real estate owned) — a total timeline of 8 months.
- Total cash in. Purchase price $45,000 + estimated legal costs $2,000 + holding costs of $300/month × 8 months = $2,400. Total cash in = $49,400.
- Sale proceeds. The REO sells at a 10% discount to the $90,000 as-is value: $90,000 × 0.90 = $81,000 gross. Selling costs of 8% (commissions, closing costs) take $6,480, leaving net proceeds of $81,000 × 0.92 = $74,520. That is the total cash out.
- Net profit. $74,520 − $49,400 = $25,120.
- Total ROI. $25,120 ÷ $49,400 = 50.85%.
- Annualized ROI. (1 + 0.5085)12/8 − 1 = 1.50851.5 − 1 ≈ 85.28%. Because the whole workout takes only 8 months, the annualized figure is much higher than the total ROI.
For comparison on the same defaults: Scenario 1 (reperform 6 months, season 12 months, sell the reperforming note at a 9% yield) earns a bigger total profit (~$31,286, 62.08% total ROI) but takes 18 months, annualizing to only ~37.98%. Scenario 3 (deed in lieu, 3 months + 4 to sell, $3,000 cash for keys) makes slightly less profit ($24,420, 48.74% total) but in just 7 months — the fastest exit and the best annualized ROI at ~97.52%. Scenario 4 (3 months to reperform, 6 months seasoning, resell the note at a 12% yield) returns 39.13% total in 9 months, ~55.32% annualized.
How the Math Works
The four workout paths in plain English
1. Reperformance / modification. You contact the borrower and work out a way for them to start paying again — often a loan modification. We assume the borrower resumes the original payment after the "months to reperform." You then collect payments for a seasoning period (buyers want to see 12+ months of clean pay history) and sell the now-reperforming note to another investor, who prices it as the present value of remaining payments at their required yield.
2. Foreclosure & resale. The borrower won't pay, so you foreclose — the legal process of taking the property. You pay legal costs and carry the property the whole time, then sell the REO, typically at a discount to as-is value, minus selling costs.
3. Deed in lieu & resale. The borrower voluntarily deeds you the property in exchange for a "cash for keys" payment, skipping the foreclosure process. Faster and usually cheaper than foreclosing, but it requires borrower cooperation and clean title (a deed in lieu does not wipe out junior liens the way foreclosure does). You then sell the property like an REO.
4. Note resale after seasoning. A faster version of path 1: get the borrower paying quickly, season for only a few months, and flip the note. Lightly seasoned reperformers sell at higher required yields (lower prices), so you trade sale price for speed.
Formulas
Monthly periodic math throughout; the monthly rate is the annual nominal rate ÷ 12.
Scheduled payment: PMT = UPB × i / (1 − (1 + i)−n) where i = note rate / 12 and n = remaining months. (If i = 0, PMT = UPB / n.)
Note resale price (scenarios 1 & 4): present value of the remaining payment stream at the buyer's yield y: Price = PMT × (1 − (1 + y/12)−n′) / (y/12), where n′ = remaining term minus payments collected during seasoning. (If y = 0, Price = PMT × n′.)
Per scenario:
- Scenario 1 & 4: timeline
T= months to reperform + seasoning months. Cash in = price + holding × T. Cash out = PMT × seasoning + note resale price. - Scenario 2:
T= foreclosure months + months to sell REO. Cash in = price + legal cost + holding × T. Cash out = value × (1 − REO discount) × (1 − selling costs). - Scenario 3:
T= deed-in-lieu months + months to sell REO. Cash in = price + cash for keys + holding × T. Cash out = value × (1 − REO discount) × (1 − selling costs).
Then for every scenario: Net profit = cash out − cash in, Total ROI = net profit / cash in, and Annualized ROI = (1 + Total ROI)12/T − 1.
Why annualized ROI matters more than total ROI
Total ROI ignores how long your money is tied up. The annualized figure converts each scenario to an equivalent per-year compounding rate so an 8-month exit and an 18-month exit can be compared honestly. On the defaults, reperform-and-sell makes the most total profit but the deed in lieu wins decisively on annualized return because capital comes back in 7 months and can be redeployed into the next note. Capital velocity is what compounds a portfolio.
Assumptions and limitations
- This is a simplified IRR-style annualization, not a true IRR: all cash in is treated as deployed at month 0 and all cash out as received at month T. Interim payments collected during seasoning actually arrive earlier, so true IRR for scenarios 1 and 4 is slightly higher than shown.
- Holding costs are applied for the entire timeline in every scenario (conservative). If your reperforming borrower escrows taxes and insurance, reduce the monthly figure for scenarios 1 and 4.
- Scenarios 1 and 4 assume the borrower resumes the original payment and the remaining term is unchanged (arrears capitalized or forgiven; no rate/term modification modeled). Model a modified payment by adjusting the note rate or term inputs.
- No taxes, no financing/leverage, no rental income while holding REO, and no borrower redemption or bankruptcy delays are modeled.
- Display values are rounded; intermediate values are never rounded.
Frequently Asked Questions
How do you calculate ROI on a non-performing note?
Add up every dollar you put in (purchase price, legal fees, taxes, insurance, servicing, cash for keys) and every dollar you get out (payments collected, note sale proceeds, or net property sale proceeds). Net profit is cash out minus cash in. Total ROI is net profit divided by cash in. Because workouts take different amounts of time, also annualize it: (1 + total ROI)12/months − 1. A 50% return in 8 months beats a 62% return in 18 months on an annualized basis.
How long does foreclosure take in each state?
Non-judicial states are fast: Texas, Georgia, Tennessee, Missouri, Arizona, and North Carolina typically run roughly 4 to 6 months. Judicial states are slow: Florida and Pennsylvania often run around 14 months, Illinois around 18, New Jersey around 28, and New York can exceed 30 months. California (~10) and Michigan (~8) sit in between. These are rough planning estimates — actual timelines vary widely by county backlog, borrower defenses, and bankruptcy filings.
Is a deed in lieu better than foreclosure for note investors?
Often yes, when the borrower cooperates. A deed in lieu (the borrower voluntarily deeds the property to you, usually for a cash-for-keys payment) skips most legal costs and can close in 1 to 3 months instead of 4 to 30+. The faster timeline usually produces a much higher annualized ROI even though the cash-for-keys payment reduces total profit slightly. The catch: it requires borrower cooperation and clean title — junior liens are not wiped out the way a foreclosure wipes them.
What is a reperforming note worth?
A reperforming note (RPL) is priced as the present value of its remaining payments discounted at the buyer's required yield. With 12+ months of clean pay history, buyers commonly require roughly 8–10% yields, which can put the price near 85–95% of unpaid principal balance for a well-collateralized note. With only a few months of seasoning, buyers demand higher yields (11–14%+), so the price drops. More seasoning generally means a better price — that is the core trade-off this calculator models.
How much does foreclosure cost a lender?
Direct legal and filing costs typically run $2,000–$3,000 in fast non-judicial states and $5,000–$10,000+ in slow judicial states like New York and New Jersey. But the bigger cost is carry: property taxes, forced-place insurance, and servicing fees of $200–$500+ per month for the entire timeline, plus property deterioration and REO selling costs of 6–10%. On a 28-month New Jersey foreclosure, carry alone can exceed the legal bill several times over.
Why does annualized ROI matter more than total ROI?
Total ROI ignores time. A workout that returns 49% in 7 months lets you redeploy capital and compound; one that returns 62% in 18 months ties money up. Annualizing with (1 + ROI)12/months − 1 puts every scenario on the same per-year footing: the 7-month deal annualizes near 98% while the 18-month deal annualizes near 38%. Capital velocity — how fast money comes back to be reinvested — is what builds a note portfolio.