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Note Discount - Information on Notes Discount Factors to Help Note Holders Understand the Value of a Private Mortgage Note

How Does A Note Buyer Calculate The Discount of a Note When You Sell a Note?

: Let me begin with the obvious. If you sold a home and are holding the note for the buyer of the property, you have in your possession a valuable, marketable asset. This asset has both a risk and a value (the value of the fixed income stream) that you can market to other people. Or if you own a house you need to sell, you can offer owner financing to get top dollar for the house, sell the house and then you can sell your mortgage note you are holding after a couple of months of seasoning for cash.

Unfortunately, many private mortgage note or trust deed buyers shroud the mortgage buying process in mystery. And while every note buyer has differing asset requirements just like a stock mutual fund would look for different requirements for stocks in their portfolio, there are 5 main factors that drive the price they will pay for a private note. I have listed them below along with what each factor relates to.

“Not only was Ron's initial quote considerably higher than other quotes I received, he took the time to fully understand my situation as well as explain the process of note pricing and selling. He then proceeded to do exactly what he said he would do. Ron earned my trust. I'll use his service again. Great friendly service and he's easy to work with.” Jim S., Bloomingdale, GA

These are:

1. The amount of equity in the property as determined by the appraised value, although if the note is being created from a sale many note buyers will use the purchase price if it is lower than the appraisal. Also, some mortgage note buyer will only use what is called a BPO or broker pricing opinion from a real estate professional. Note buyers will also want to see the comps for the appraisal or BPO to be sure they are both recent and reasonable (similar size, close proximity, etc.). Higher equity amounts will result in a higher note purchase price due to lower risk. (Risk)

2. Seasoning on the note, meaning it’s been around a while. In this instance a note buyer is primarily looking for a good payment history. They want to see that the note is being paid and the longer, the better. (Risk)

3. The interest rate on the note. The higher the rate or spread as compared to a benchmark such as treasuries, the higher the price offered. Note holders should be very aware of this factor for their asset. If, as many experts predict we go into a period of significant inflation due to all the government spending, the value of their private note could drop significantly. (Time value of money.)

4. The time left on the note (or balloon period). While this will effect the price, some note buyers like longer periods than others. (Time value of money)

5. The creditworthiness of the borrower. Most note buyers have set minimum credit score requirements in order to purchase a note. Additionally, they will want to review the mortgagors credit report for mortgage history, recent bankruptcies, etc. (Risk)

Note buyers will usually add a sixth factor, the size of the purchase price (Risk). The higher the dollar exposure, the less tolerant they will be on credit, seasoning, etc.

One last word about note seasoning, in particular as it relates to the sale of a note through simultaneous closings. Obviously, selling a mortgage note created from the sale of a home results in the least amount of seasoning for a note. And while this would lower the price a note buyer is willing to pay, if there is a good down payment or combination of a good down payment and the seller is willing to hold a second, this type purchase can be a great deal for the home seller. This is due to the home seller 1) Being able to sell the home much faster, 2) Usually getting top dollar for the property and 3) Not having to pay real estate commissions.

I hope this pricing information was helpful.

 

How Does A Mortgage Buyer Figure A Notes Discount When Buying A Mortgage Note?

To begin with let me state the apparent. If you sold a house or commercial property and are holding the owner financed mortgage for the purchaser, you have a precious asset that can be marketed. This as any other financial asset has a risk and a value (worth of the future income stream ) that you can sell to other individuals or purchasers. Or if you own a house you need to sell, you can offer owner financing to get top money for the house, sell the home and then you can sell the note you are holding in a immediate closing for an immediate payoff.

Many private purchasers present the note purchasing process a mystery. And while not every mortgage mortgage note buyer has the identical requirements just like a stock mutual fund there are five key factors that affect the price a mortgage buyer will pay for a private mortgage. I have listed them below.

These primary factors are:

1. The buyers equity in the property based on its appraised or estimated price or sales price. The greater the purchase price as there is less risk for the buyer. This is why you want to get as large a down payment as possible. (Risk)

2. The amount of seasoning on a note, meaning it's been around a good while. In this example private mortgage purchasers are primarily looking for a good payment history. These investors want to see that the mortgage note is being paid and the longer, the better. While seasoning is important in determining risk, most note buyers view a note where there is a nice amount of equity as less risky than one with a lot of seasoning and a small amount of equity. This is even more so for non-owner occupied properties. (Risk)

3. The interest rate on the mortgage note. The greater the interest rate or spread as compared to a benchmark such as US treasuries, the higher the price paid. Private note holders should be keenly aware of this factor for their financial asset. If, as many gurus see coming we go into a period of significant inflation due to all the government spending, the value of their private note could go down significantly. (Time value of money.)

4. The time left on the note (or balloon period). While this will effect the price, some private note buyer like lengthier periods than others. (Due to the time value of money)

5. The credit quality of the buyer. Most private mortgage investors have established minimum credit score requirements in order to purchase a private note. Additionally, they will want to examine the buyer's credit report for its history, recent bankruptcies, etc.

Some note buyers will add a sixth issue, the size of the purchase outlay (Risk). The larger the monetary exposure, the less liberal these private investors will be on the buyer's credit, seasoning, etc.

One final word about seasoning, particularly as it relates to the sale of a private note through simultaneous closings. Obviously, selling a note created from the sale of a house will result in the lowest amount of monthly seasoning for a note. And while this would lessen the price a note buyer is willing to pay, if there is a good down payment or combination of a good down payment and the home seller is willing to hold a second mortgage, this type purchase can be a very nice deal for the property seller. This is due to the house seller 1) Being able to sell the residence much earlier, 2) Usually being paid top dollar for the property and 3) Not having to pay a Realtor's commissions.

So that's it, private mortgage or note selling revealed. I am hopeful this was enlightening.

 

US Note Buyer

 



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