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 buyers 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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