Things That Can Determine How Much You Can Expect
It goes without saying that any real estate note owner looking to sell his or her note will want the highest price possible. Equally obvious is that every note owner thinks his or her note is worthy of top dollar. We will point out some of the things real estate note investors look for when evaluating a note to purchase from the perspective of the buyer so that a seller will have an understanding and appreciation of how the offer was determined.
Value of the Property Securing the Note
The value of the property in its “as-is” condition is one of the first things an investor will look at. This is important if the investor needs to recoup his investment in case of default by the borrower.
Sales Price of the Property
The sales price of the property is also important. Was it sold at a price that was justified with an appraisal or comparable sales report? Did the borrower have a suitable down payment? The higher the down payment, the better. Most note buyers would prefer to see a down payment of 10% or more of the sales price. The more equity the borrower has, the less likely they will default on their obligation.
Position of the Note
The lien position of a real estate note is important if the borrower goes into default for any reason. A first position note is more secure than a second position note or third position note and so on. As implied, in the case of foreclosure, the creditors will be paid according to their recorded lien position. The sales price at the foreclosure sale will first cover the obligations due to the first lien holder and on down to the last. If the winning bid at the auction is not enough to cover all lien holders, then some creditors may not be able to recover any funds.
Terms of the Loan
Another consideration that is important to a buyer are the terms of the loan. The terms of a loan include: the interest rate, the amortization period (how long the borrowers have to repay the loan), and in some cases a balloon payment (full payment of the balance of the loan after a period shorter than the amortization period).
Each investor’s objective is different and therefore, what one investor will buy will not suit another investor’s objectives. For example one investor may like the fact that a note has a balloon payment at the end of 5 years, but another investor may not want to risk the chance that the borrower might not be able to secure other financing to pay off the balance when the balloon payment becomes due or have the cash to pay off the balance.
Borrower’s Credit Profile
The credit worthiness of the borrower is also a factor used in determining the price a buyer will pay for a note. It is important to get a credit report and credit score of your borrower and keep those records to show an investor who might be interested in buying your note. Equally important is the borrower’s financial strength as well as employment history that show their ability to continue paying for the length of the term.
The Sales Documents and The Note
The perspective note buyer will want to look at verbiage on the note to see if the dates, terms of the note and ability to collect are properly documented and adequately secured by the property. If escrowing for taxes and insurance, these should also be included on the note. The Deed of Trust and Warranty Deed with Vendor’s Lien should have been recorded and a copy of these should be supplied to the perspective buyer for evaluation.
Other Records
An accurate payment record showing dates, amount paid along with a copy of the payment made will help and investor with his or her decision on whether or not to buy your note. Copies of the property’s insurance coverage and record of tax accounts showing current status will also help the investor determine his bid for your note. “Seasoning” is the term used to describe how long a borrower has been paying on the note. Investors like to see at least 3 to 6 months of on-time payments before buying a note.
Time Value of Money
The time value of money can be summed up like this. A dollar today is worth more than that same dollar in five, ten, twenty or thirty years. For example if someone offered you $1.00 today or $0.20/month for the next 12 months, you would more than likely take the $1.00 now even though twenty cents a month for the next twelve months is the higher amount. Because of the time value of money, expect to get less than the actual balance of the note when you sell it. How much less will be determined by the real estate note investor and his investment goals.
Conclusion
The above mentioned items are all critical in determining the bid an investor will place on a note that he or she is considering buying, however each investor will weigh each one of those items differently to fit his or her objectives and tolerance for risk. For example if a note is in default and secured by a dilapidated house on a desirable street an investor who wants the land may not care that he will need to foreclose on the borrower and raze the property if his objective is to build on the land. However, other investors may not want to do all that work and incur those expenses.
The computation of the yield an investor requires on a note purchase and thus the bid he makes to the seller can be lengthy and complicated and is not within the scope of this article. In essence, there is no “standard” discount an investor will ask for when they bid on a note.
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If you currently own a real estate note and are in need of immediate cash, we would like an opportunity to bid on and possible BUY YOUR NOTE! With over 20 years experience in the private note industry, our experienced staff is available to provide you with a quick quote and help make it easy for you to get the most for your note. Visit us today at www.notebuyingusa.com or contact us at 1-877-399-1211. If you are considering offering owner financing when you sell your property, please click here to receive your free copy of “10 Critical Steps to Creating a Sellable Note”.
This information is intended to be used as a general guide. It is not intended to constitute legal advice and is not a substitute for the advice of an attorney. While every effort has been taken to present the information accurately, this document may not be infallible. No warranty is made that these materials are current, complete, accurate, or suitable for any particular purpose. You should seek advice from your attorney before proceeding with any real estate transaction.
