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First,
I would like to begin with the basics a Notes
Buyer looks at.
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 the mortgage
you are holding in a simultaneous closing for
an immediate payoff.
Unfortunately, many private mortgage notes buyers
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.
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The
primary factors a Notes Buyer is using to price
a note are as follows:
1. How much equity is 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
appraised value. Additionally, 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. How long the buyer has ben paying on the note
or as Note Buyers call it "Seasoning on the
note" is very important. For this element,
note buyers are primarily looking for a good payment
history. They want to see that the note is being
paid and the longer, the better. Most note buyers
don't really care if the payments have been a
few days late, just as long as they have never
been 30 days late. (Risk)
3. What the interest rate on the note is. The
higher the rate or spread as compared to a benchmark
such as treasuries, the higher the price a notes
buyer will offer. 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 number of months remaining on the note
(or balloon period). While this will impact the
price, some notes buyers like longer amortization
periods than other , although most don't like
very long maturities and will discount accordingly.
(The time value of money)
5. The credit strength of the borrower(s). 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. (Concentration of
risk)
One last word about 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 Notes Buyer pricing
information was helpful. For more on the process
of selling a mortgage, go to selling
mortgage.
Or go to Sell
A Note for some information on why someone
would sell a note. Our toll free number for requesting
a quote is at sell
my note.
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