Hows A Private Note Buyer Computes The Price They Pay

2013 July 10

For starters let me state the apparent. If you sold a house or commercial real estate and are holding the owner financed note  for the purchaser, you have a precious financial asset that can be marketed. This as any other financial asset has a risk and a value (value of the future stream of income ) that you can sell to other individuals or purchasers. Or if you own a home 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 mortgage note you are holding in a concurrent closing for an immediate payoff.

Many mortgage buyers present the note buying process a mystery. And while not every mortgage private note purchaser has the identical requirements just like a stock mutual fund there are 5 principal elements that affect the value they will pay for a owner financed note. I have listed them below.

These factors include:

1. The the amount of equity the buyer has in the property as determined by on its appraised or estimated worth or sales price. The higher the equity, the greater the purchase price as there is a smaller amount  risk for the purchaser.

2. Seasoning on the mortgage, meaning it’s been around a good while. In this instance private mortgage  investors are for the most part looking for a good payment history. These buyers desire to see that the mortgage  is being offered and the longer the time period, the better. (Risk)

3. The rate of interest on the private note. The higher the interest rate or spread as compared to a benchmark such as the ten year treasury, the greater the price offered. Mortgage note sellers should be keenly aware of this factor for their asset. If, as many gurus forecast we go into a time of significant inflation due to all the government spending, the value of their private note could fall significantly. (Time value of money.)

4. The time left on the note (or balloon period). While this will impact the value, many mortgage investors like lengthier periods than others. (Due to the time value of money)

5. The credit quality of the borrower. Most mortgage note purchasers have established minimum credit score requirements in order to buy a mortgage. Additionally, these private investors will want to evaluate the buyer’s credit report for its history, recent bankruptcies, etc.

Mortgage note buyers will usually add a sixth issue, the size of the purchase outlay  (Risk). The higher the dollar exposure, the less liberal they will be on credit, the amount of seasoning, etc.

One final word about note seasoning requirements, in particular as it pertains to the sale of a note through simultaneous closings. Obviously, selling a mortgage note formed from the sale of a residence results is the lowest period of monthly seasoning required for a note. And while this would cut the price a note investor is willing to pay, if there is a respectable down payment or combination of a good down payment and the seller is willing to hold a second mortgage, this type purchase can be a very nice deal for the home seller. This is due to the residence seller 1) Being able to sell the home much earlier, 2) Usually being paid top money for the home and 3) Not having to pay sales commissions. One more thought. You can also sell a land contract with an underlying mortgage. You just need to be sure the price is high enough to pay off the existing mortgage.

So there you have it, private mortgage note or mortgage selling revealed. I hope this was enlightening.

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