notes buyers

Note Buyer Pricing or Purchasing Private Notes?


First, I would like to begin with the basics a Note 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 note buyers or trust deed buyers shroud the mortgage buying process in mystery. And while every purchaser 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 your income streame. I have listed them below along with what each factor relates to.

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The primary factors a Purchaser is using for pricing your real estate income stream 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 purchasers will use the purchase price if it is lower than the appraised value. Additionally, some will only use what is called a BPO or broker pricing opinion from a real estate professional. Most 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 purchase price due to lower risk. (Risk)

2. How long the buyer has ben paying aka "Seasoning on the note" is very important. For this element, purchasers are primarily looking for a good payment history. They want to see a year or two of pay history and the longer, the better. Most 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 is. The higher the rate or spread as compared to a benchmark such as treasuries, the higher the price they 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 income stream could drop significantly. (Time value of money.)

4. The number of months remaining (or balloon date). While this will impact the price, some will like longer amortization periods than others, 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 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)

Many will 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)

Obviously, selling an income stream with little seasoning would lower the price someone is willing to pay. However, a good down payment or combination of a good down payment and credit can partially offset the higher discount. Also, with the larger down payment you lower the amount borrowed hence less dollar discounted.

I hope this pricing information was helpful. For more on the process of selling a mortgage, go to home page.



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