Investors Academy Part 3: Understanding the Recovery Process.
Whether you’re a new or seasoned investor in Indemo, it’s always worth having a good insight into the types of products you’re investing in.
Although Discounted Debt Investments are a completely new concept to everyday investors, they’ve long helped diversify the portfolios of some of the most successful institutional investors. Investments in “Non-performing loans” as the institutions call them, have been prevalent for decades now, with high net worth individuals benefiting from their stability, security, and predictable returns.
We call them Discounted Debt Investments because we think that better describes the nature of the product. Here’s why:
What is a Discounted Debt Investment?
A DDI is an investment product available on Indemo that involves you purchasing a mortgage loan on a property that has defaulted. The loan is purchased at a heavily discounted price compared to the true value of the property.
As an investor, you stand to gain returns through the eventual sale of the property, or through the recovery of repayments. By purchasing the debt at a discount, there is significant potential for profit, especially as the legal recovery process progresses.
How can I buy and sell DDI’s on Indemo?
On the secondary markets, DDI’s can be bought and sold at any stage of the recovery process, providing freedom and flexibility to open and close investments according to individuals goals and strategies. Rather than waiting for the entire court proceeding to end, investors can exit their investments faster by selling them on the Secondary Market.
Understanding the different stages of the recovery process is important, as purchasing the debt at any of the phases has an impact on both risk and reward.
When we think of “risk” with DDI’s - we’re not necessarily talking about profit. The underlying asset that makes up a DDI will almost always be sold at a profit - it’s just a matter of time spent waiting for that sale. For example, buying at Stage 1 and selling at Stage 2 may bring you a 15% return. The person who buys at Stage 2 then sells at Stage 3 may also make a 15% return. The difference is in the time spent waiting between each of the stages.
Indemo’s upcoming Secondary Market function represents the first ever time that investment products like DDI’s can be bought and sold between everyday people - providing exciting opportunities for investors to use available information about the market to make insightful plays. It will be available in H1 2025, and will come equipped with all the data you need to make informed exit decisions.
The 4 stages of the DDI Recovery Process:
All banking systems in Spain use a standard legal process to handle unpaid loans on property. All of the DDI’s that are serviced on Indemo will go through this standard process, making return estimates and timeframes very predictable. Before they become available on Indemo, the DDI’s are vetted and signed off by banks that have issued the loans on the underlying asset.
Each stage of the process has various milestones within it that can affect the value of the DDI. The value of your investment can change within each stage, not just when the process moves onto the next stage. It’s important to use the information and data we’ve made available on the Secondary Market dashboard. This will help you predict the pricing of subsequent stages, make informed decisions, spot trends, and capitalise on opportunities.
As shown in the diagram, as the stages progress, the PTV (Price-to-Value ratio) increases, indicating that the price of the investment rises as the time to recovery shortens.
- Stage 1: Preparation for Court
This is the very first stage in the recovery process. At this point, the party who owes the debt has been notified of the outstanding balance, and provided a final chance to pay before legal action is taken. They will usually have 10 days to settle the debt from receiving the notice - after which the process moves onto the next stage.
At this stage, the Discounted Debt Investment is available to purchase at the lowest possible price because it’s furthest away from the conclusion of the recovery process. Investors can therefore take this opportunity to get in early, with the potential for high returns once the underlying property is sold, or maximum profit if a court settlement is reached earlier than expected.
Investors can take an early position when buying at the beginning of Stage 1, as soon as our service partners list the DDI on Indemo. These investors can sell to other buyers who want to purchase at an early stage too. An investor who purchases at the start of Stage 1 can still make a profit by selling to an investor at the end of Stage 1.
- Stage 2: Court Proceedings
If the debtor refuses to settle, then legal proceedings commence. The creditor will file a claim, and the court will begin the process of verifying the debt, notifying the debtor, and confirming legal claims on the property. After this, the court will accept the claim, and officially begin the debt recovery process.
Uncertainty is reduced at this stage, as the process has now moved to the courts - increasing the possibility of repayments or a sale. Since more time has passed, and a potential sale or settlement is closer, the price of the investment rises. For investors purchasing the DDI at this stage, the discount is still significant, and returns are still high if the debtor doesn’t oppose the case or settle the claim.
Some of the earliest investors may choose to sell at this point, taking advantage of the fact that legal proceedings have started, and that the case is in court. This increased confidence in the eventual recovery of the debt can spike demand for the investment, making it a good time to sell for those who wish to lock in profits without waiting for the legal process to finish.
- Stage 3: Auction
After legal proceedings have started, and the debtor still fails to make repayments, then the property will be listed at auction by the courts. The underlying asset becomes publicly available for purchase, and the highest bidder will win the property.
In the event that there are no bids for the property, or the highest bid is lower than we expect as a healthy return for investors, our debt supplier partners will exercise the right to transmit the claim into possession and sell the property on the market.
This is a significant stage for early investors, as a sale event can often mean the highest profit potential.
By the time the property has been listed at auction, most of the wait has passed, and the likelihood of recovery is high. A settlement at this stage would not influence the value. Purchasing at this stage means that returns will be lower because the amount of uncertainty has considerably reduced. The price of the DDI will have increased significantly by this point.
Investors who purchased the DDI early can now sell at a premium. This is a great time for early stage investors to meet the demand of investors who prefer more certainty over the recovery of the underlying asset. For Stage 1 investors, selling on the Secondary Market is optimal at this point.
- Stage 4: Post-Auction: Possession and Takeover
The property has been listed at auction, and sold to the highest bidder. As they take possession of the property, legal ownership is transferred, and the asset is ready to be sold on the open real estate market. The recovery process is complete.
Since almost all of the process is complete, this the most expensive stage to buy at, with the lowest potential returns when compared to the earlier stages.
Why invest in Discounted Debt?
Investing in Discounted Debt provides a unique opportunity to diversify your portfolio in a meaningful way. DDI’s offer a powerful combination of high returns and real asset security. By purchasing the debt at a heavily discounted price, you’re able to earn as each stage of the recovery process unfolds.
DDI’s represent a unique, secured, mid term investment that is relatively low risk, and high yield. The ability to exit your investments faster on Indemo’s Secondary Market provides complete control and flexibility, allowing you to speed up the time you receive a return.
Since all of the products we offer on Indemo are backed by real estate in Spain, you can enjoy a level of security absent from more traditional everyday investments like stocks, bonds, or crypto.
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This content is a marketing communication. It shall not be treated as investment advice, independent research or offer, recommendation or invitation to invest in the investment opportunities referred to herein. The content is not aimed at promoting services or products to persons based in jurisdictions where the distribution of said information would be illegal.
Investing in financial instruments involves risk, and there’s no guarantee that investors will get back invested capital. Moreover, past performance does not guarantee future returns. Indemo SIA shall not be responsible for any direct or indirect loss from using the provided information.