Other types of real estate investment. Credit Purchase.
We would like to briefly and succinctly present a type of investment, rare among small investors or individuals, which can become very interesting due to the high returns it can offer.
This is the purchase of credit, guaranteed by mortgage. What in the financial world is known as Non Performing Loans (NPLs). Which technically are loans that have been unpaid for a minimum of 90 days.
What does it mean to buy or acquire the mortgage loan?
In this type of operation we are not buying a property directly, but acquiring the mortgage loan that encumbers the property, that is, we put ourselves in the position of the creditor, which will generally be a financial institution.
Let us imagine a company XXX that has a mortgaged property in default, that is, with pending receipts.
The Bank / creditor has three options to recover that debt:
When the credit sale route is chosen, the creditor must be willing to accept a large discount.
What does it mean to sell debt at a discount?
Taking into account that it is a doubtful credit, and that the creditor is going to collect immediately (with the corresponding savings in legal costs and subsequent development of the sale), the seller must accept a discount on the guaranteed amount, that the buyer must weigh based on the amount of the outstanding debt, the days that the credit has been unpaid, the stage in which the judicial procedure is (if applicable), the appraisal value of the property for the granting of the credit and its current market value.
From all these factors we will obtain the potential margin of the operation and, consequently, the discount or haircut that we can negotiate with the seller based on our profit expectation.
For example, a creditor holds a debt against the company XXX for which he credits 400,000 Euros and sells it to us for 250,000 Euros so that we, the buyers, are the ones who subrogate ourselves in his position and continue with the legal claim. In its day the estate was valued at €600,000, and currently has a market value of €500,000.
Given that, in the worst case (The casuistry varies depending on whether the property to be auctioned is the debtor's habitual residence or not, and whether or not the property covers the amount of the debt), we will be awarded the property at auction for €420,000.00, this leaves us with a gross margin of €250,000.00 - €42,000.00 (transfer tax) = €208,000.00, without counting the possible costs of adapting the property and the subsequent sale.
Another option that exists in auction in case of not being interested in the adjudication of the property is to go and defend our credit, so that any bid made by third parties above 250,000 Euros -purchase amount of the credit- up to 400,000 Euros -total debt - will be, excluding the expenses derived from the purchase, a capital gain.
Obviously, this type of operation requires an exhaustive analysis by an expert to check if it can be a good investment. The keypoints to analyze are the following:
Taxation of the acquisition:
Who is taxed is the buyer since the seller recovers his debt, he does not obtain a benefit for which to pay taxes.
1. Assignment of simple credits, without collateral.
2. Assignment of mortgage loans,
Subsequent taxation:
1. Assignment of simple credits: The gain (what is recovered - assignment price + expenses) will be taxed by IS or IRPF.
2. Assignment of mortgage loans: The capital gain will be taxed by IS or IRPF.
As can be seen, this mode of real estate investment requires a good legal team that analyzes the viability of the operation, not only from an economic point of view, but also from a procedural and legal point of view.
At Colomer Ventalló, we not only advise clients who want to buy credit, but we usually have a product.
We remain at your disposal for any questions or queries you may have in this regard.