What I’m reading: On Competition by Michael Porter
A quote from Porter that’s on my mind: “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.”
I pick up Porter’s On Competition every year or so and read 100-odd pages. It grounds me because it pulls against the gravitational force in business to do more things. Clients will ask me to provide a new service, I see the potential money there, say yes, and before I know it I am engaged in an ancillary service without considering its relationship to the other activities within my business. Porter’s writing creates intentionality about the activities I engage in and their relationship with one another.
Here’s an example of a potential new activity that I’m considering in light of this. We lend in New Mexico. New Mexico has a redemption statute that allows foreclosed-upon homeowners to “redeem” the foreclosure—think “unwind.” Redemption involves either:
directly paying the purchaser of a foreclosed property who was the highest bidder at the sale or
filing a petition with the district court against the purchaser of the property who was the highest bidder at the sale
The amount of the redemption is equal to the winning bid amount at the sale, plus 10% annual interest from the date of purchase, plus any property taxes paid by the winning bidder plus 10% annual interest from the date of the tax payment. If you check all of the statutory boxes including paying these fees, then the foreclosed property is yours, rather than the property of the party that won a public auction for it.
Real estate is often described as a bundle of rights. In New Mexico, the redemption right is a discrete right that may be sold or assigned. Even though the statute grants something like 9 months to a foreclosed party to redeem, the loan docs typically contractually modify the redemption period to one month. There’s a weird thing that happens with foreclosures. A lot of borrowers with equity are in disbelief and put their heads in the sand until it’s too late. While the redemption statute gives borrowers one more chance to make things right, few borrowers can come up with a six-figure sum ever, let alone in a month.
Enter redemption rights buyers. New Mexico real estate investors buy redemption rights for a few thousand dollars from foreclosed-upon borrowers. Now the problem of writing a six-figure check within a month becomes their problem. Recently a few borrowers have asked me if I lend on “redemption deals.” The trouble is title insurance companies won’t provide lender’s title insurance on a redemption deal until the title vests in the name of the redeeming party (my borrower). I literally have no collateral for the loan for a few months while we wait for this process. For many of my would-be borrowers, this creates a Catch-22. We’d lend them the money they need if the title vested in their name, but the title won’t vest in their name unless we lend them the money they need.
We could solve this problem by purchasing redemption rights, redeeming the foreclosure, taking title to the property, selling the property to a borrower and carrying paper. Voila, we have made a loan! The four issues for me to consider are:
How much greater is the risk profile of this deal? How do I manage title insurance risk? Property insurance risk? Estimating renovation costs?
Do I directly source redemption deals or purchase them from third-party “redemption rights buyers”? (and therefore act purely as a liquidity provider?)
Does this business activity complement my core fix and flip hard money business or distract from it?
Are my co-investors interested in these deals? How much additional expected return compensates them for the risks and me for the incremental work?
I’m interested in your feedback on this potential business line.