Someone recently asked me why certain opportunities seem to have outsized returns. I believe this is the likely answer: Scams account for 99% of those opportunities, while the remaining 1% might result from someone getting squeezed, whether fairly or unfairly. This doesn’t hold true all the time: sometimes it’s just creative financial engineering, but you can often spot these types of deals.
I can think of 3 cases:
Tax foreclosures – These offer possible outsized returns since appraised values and tax dues are normally really low. If you get it right, you can achieve a 100% return over a year or so. Who gets squeezed? Maybe the government, definitely the owner.
Mortgage foreclosures (private), but only in certain instances – This works when you already have tons of money and manage to lend at LTVs of 10% to 20%, or when you’re taking over an illiquid lender. Who gets squeezed? Mostly the borrowers, sometimes both lender and borrower.
“White Knighting” – or some version of it. This includes “Pasalo” transactions or more complicated ones like executing private equity deals on nearly bankrupt businesses. Who gets squeezed? Definitely the original owner.
Still, people can’t complete deals without mutual benefit, as they would resist grossly unfair transactions. Finding the sweet spot for all stakeholders will make or break your deals. I learned that the hard way 🙂