Returns and risks of discounted debt
The potential return of discounted debt and the risks you take on: court timelines, collateral value, occupancy and how to analyse a deal first.
How return is generated in discounted debt
Return in this type of investment comes from the spread between what you pay and what you recover. If you buy a 100,000-euro credit for 55,000 and recover 80,000 (whether through a borrower settlement, a property auction or selling the credit to another investor), your potential profit is 25,000 euros on an investment of 55,000: 45% before costs.
The key factor is the initial discount. The lower the purchase price relative to the real value of the collateral, the more safety margin the deal has. But that discount may also reflect higher risk: a property in a low-demand area, a resistant borrower or additional charges.
- Analyse the collateralLand Registry extract, prior charges, occupancy and real market value against the appraisal.
- Buy at a discountThe lower the price relative to the real value of the collateral, the more safety margin the deal has.
- Choose the recovery routeA borrower settlement, a property auction or selling the credit to another investor.
- Wait out the timelineEnforcement can drag on for several years with your capital tied up, and that reduces the IRR.
- Subtract the costsSolicitor and court agent fees, taxes, property renovation and maintenance during the process.
- Measure the resultThe spread between what you pay and what you recover, set against the time it took.
Why we do not give you a return figure
We do not publish a typical return because there is no serious source measuring it for private investors in Spain, and a round number without a source ends up working as a promise. Funds work with portfolios of hundreds or thousands of loans: some deals offset others and what they measure is the result of the whole.
Whoever invests in single deals has no such offset. Each deal is its own result, good or bad, and concentration risk is maximal: if you only have one and it goes wrong, nothing makes up for it. That is why what helps is not an average, but working through each deal with its scenarios.
Factors that determine real return
- Purchase price: the initial discount is the main driver of return. A 50% discount on collateral value gives far more cushion than a 20% one.
- Recovery route: collecting via a borrower settlement is faster and cheaper than going to auction. Auction is slower and has legal costs.
- Deal timeline: IRR depends on time. A deal that generates 40% profit in 2 years is very different from one that generates the same profit in 5 years.
- Recovery costs: solicitor and court agent fees, taxes, property renovation costs and maintenance during the process.
- Final asset value: if the property is adjudicated, the sale price determines the return. An active property market facilitates exit; a stalled one complicates it.
Main risks of investing in debt
Investing in discounted debt carries real risks that are worth understanding before committing. It is not a passive investment: it requires monitoring, legal advice and the capacity to wait.
Court timeline risk
Mortgage enforcement in Spain can drag on for several years; it depends on the court and on the borrower's opposition. A long timeline reduces the IRR even if the final outcome is positive. During that time your capital is tied up.
Collateral value risk
The property appraisal may not match actual market price. If the property is in a low-demand area, if the market has fallen since the appraisal or if the asset has structural problems, the sale price can be much lower than expected. Collateral analysis is the most important part of the deal.
Occupancy risk
If the property is occupied (by the borrower, tenants or third parties), recovering possession requires an eviction proceeding that can take months. Situations of irregular occupancy complicate the process further. Occupancy status is one of the first things to investigate.
Hidden charges risk
A property may have prior charges (senior mortgages, attachments from the tax authority or social security) that predate the credit you bought. In that case, if you are awarded the property at auction, those charges are yours. They can wipe out your margin or even cause a loss. The Land Registry extract is essential.
Legal risks: redemption, unfair terms and insolvency
If you buy a credit that is already in litigation, the debtor can extinguish it by paying you what you paid, plus costs and interest: this is the litigious credit redemption in article 1535 of the Spanish Civil Code, and it turns your discount into theirs. Whether it applies to bulk portfolio purchases is debated in the courts. A consumer debtor can also oppose enforcement alleging unfair terms, which the court reviews even of its own motion and which can suspend it or reduce the amount claimed. And an individual can also enter insolvency proceedings: enforcement may be stayed and the debt affected by the discharge of unpaid liabilities. All three deserve a lawyer's review before you buy.
Before buying a credit at a discount, check whether it is already in litigation: that is what triggers the redemption, and the margin you calculate may not be yours.
Concentration risk
If you put all your capital into a single deal and it goes wrong, there is no diversification to cushion the blow. Professional funds invest across portfolios of hundreds of loans; the private investor usually has one or two. That concentration risk is the hardest to manage.
Same deal, three possible outcomes. A 90,000-euro credit bought for 50,000, with a property whose auction value is 110,000. Good scenario: the borrower settles and pays 70,000 after 8 months, with 3,000 in legal and management costs. You gain 17,000, 34% on the amount invested in 8 months. Neutral scenario: the property goes to auction after 18 months and a third party is awarded it at 80,000; as your credit is 90,000, you collect the 80,000, with 6,000 in legal costs. You gain 24,000, 48% in 18 months: more profit than the good case, but in more than twice the time. Adverse scenario: the auction arrives after 30 months, the award is approved at 55,000 to a third party (the property is not a primary residence, so 50 per cent of the auction value is enough) and legal costs add up to 8,000. You collect 55,000 and lose 3,000, 6%; the rest of the credit remains outstanding against the debtor, but collecting it is uncertain. The calculation excludes taxes on buying the credit and on the gain, and the cost of capital tied up. The figures are invented and none of these scenarios is certain or representative: every deal is different.
| Scenario | What happens | Costs | Result |
|---|---|---|---|
| Good | The borrower settles and pays 70,000 euros after 8 months | 3,000 euros | You gain 17,000, 34% in 8 months |
| Neutral | Auction after 18 months; a third party is awarded the property at 80,000 euros | 6,000 euros | You gain 24,000, 48% in 18 months |
| Adverse | Auction after 30 months; the award is approved at 55,000 euros to a third party | 8,000 euros | You lose 3,000, 6%, and the rest of the credit remains outstanding against the debtor |
How to mitigate the risks
- Always review the Land Registry extract before bidding or closing an assignment.
- Compare the appraisal with real sale prices in the area (property portals, recent transactions).
- Investigate occupancy status: if you cannot view it, discount that risk from the maximum price you pay.
- Get specialist legal advice: a mortgage enforcement solicitor can spot issues you would miss.
- Do not put into a single deal more than you can afford to lose.
- Keep a liquidity buffer for unexpected costs during the process.
In the InvertirDeuda catalogue you see the data these scenarios are built from, as provided by the fund: the debt, the collateral, known charges, the judicial phase and occupancy when available. What is missing shows as no data. The calculation and the final decision are yours, with your adviser.
Tell me about new assets in my province
New assets enter the catalogue every week: mortgage-backed debt, judicial auctions and foreclosure assignments. We send you the ones in your province, with the judicial stage explained, no account needed.
Frequently asked questions
- Is the return guaranteed when investing in debt?
- No. It is a potential return, not guaranteed. Investing in debt carries a real risk of loss and the outcome depends on each deal: the court timeline, the property value and the recovery route.
- What return can I expect from discounted debt?
- There is no reliable typical figure for private investors. It depends on the purchase price against the real value of the collateral, the recovery route and, above all, the timeline: the same profit in eight months or in three years is a very different investment. Work through each deal with a good, a neutral and an adverse scenario.
- What is litigious credit redemption?
- It is the debtor's right to extinguish a credit that was sold while in litigation by paying the buyer what the buyer paid, plus costs and interest (article 1535 of the Spanish Civil Code). If you buy a litigious credit at a discount, the debtor can take your margin.
- Is negotiating with the borrower more profitable than going to auction?
- Often, yes. A friendly settlement is faster (months versus years), avoids court costs and improves the IRR even if the recovered amount is somewhat lower. But the borrower is not always willing or able to negotiate.
- What happens if the property sells at auction for less than I paid for the debt?
- If the auction award price is lower than your debt purchase price plus costs, you have a loss. That is why the margin between purchase price and the property's real value is the most important safety factor in the deal.
- How do I know if a credit's purchase price is reasonable?
- By comparing the price with the real market value of the property securing it, subtracting prior charges, the estimated court process cost and the estimated timeline. If after those deductions the margin is still positive, the deal may make sense. If not, the purchase price is too high.