Case Study: 380% IRR on a Second Lien Discounted Payoff
A real-world NPL case study where an investor purchased a non-performing second lien for $120,000 and received a $333,900 payoff in just two months — generating a 380% internal rate of return through a discounted payoff strategy.
The Setup
An investor identified a non-performing second lien — a junior mortgage where the borrower had stopped making payments. The borrower had already listed the property for sale, signaling they wanted out of the situation entirely.
The investor acquired the note for $120,000.
Because this was a second lien, the purchase price was based on a percentage of the unpaid principal balance (UPB), not the property's fair market value. Second lien NPLs are priced this way because the investor's leverage comes from the borrower's "emotional equity" — their desire to resolve the debt — rather than direct control over the property.
The Resolution
With the property already listed, the resolution path was clear: a discounted payoff (DPO) funded by the proceeds of the home sale.
The investor worked with the borrower and the closing agent to ensure the second lien payoff was included in the settlement statement. When the property sold, the investor received the full payoff amount of $333,900 from the sale proceeds.
No loan modification. No foreclosure. No lengthy workout. The borrower wanted to sell, and the investor's lien was satisfied at closing.
The Numbers
| Metric | Value |
|---|---|
| Purchase Price | $120,000 |
| Payoff Amount | $333,900 |
| Gross Profit | $213,900 |
| Hold Time | ~2 months |
| IRR | 380% |
The internal rate of return was 380% — driven almost entirely by the speed of the resolution. The absolute dollar profit of $213,900 on a $120,000 investment is strong on its own, but the two-month timeline is what makes the IRR extraordinary.
Why This Worked
Three factors aligned to produce this outcome:
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The borrower was already motivated. The property was listed for sale before the investor even acquired the note. The borrower wanted to move on, and paying off the second lien was necessary to deliver clear title to the buyer.
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There was enough equity. The property sale generated enough proceeds to cover both the first mortgage payoff and the second lien settlement. If the property had been underwater, there would have been nothing left for the junior lienholder.
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The investor bought at the right price. Paying $120,000 for a note that could return $333,900 required accurate due diligence on the property's likely sale price and the outstanding first mortgage balance. The investor had to be confident that enough equity existed to cover their position.
The Takeaway
DPOs are the highest-IRR exit strategy in note investing because they compress the timeline. When a borrower has access to a lump sum — from a property sale, family resources, a 401(k), or refinancing — the investor can realize their profit in weeks rather than months or years.
The key is buying right. Not every second lien has this kind of equity cushion, and not every borrower is ready to settle. The investors who consistently generate DPO exits are the ones who identify these favorable conditions during due diligence, before they place a bid.
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