Understanding the logic of note discounting
When the owners of real estate notes liquidate their investments the resulting sales will almost always require some kind of discount. Here’s an easy explanation of the Investment to Value (ITV) method that many Note Buyers use to determine their pricing.
Most experienced Note Buyers have predetermined guidelines in mind that serve to narrow their focus to the notes that are likely to fit their buying preferences. Still, many buyers will purchase almost any note if the price is right – in other words, if the financial rewards are in line with the associated risk. To compensate for added exposure buyers adjust their pricing guidelines downward, which results in a higher yield.
Many buyers gauge their risk in a deal by considering their Investment to Value (ITV) percentage. ITV measures the amount of protective equity the Note Buyer has by comparing her purchase price to the property value. The amount of protective equity in the property is calculated by subtracting the ITV from 100. The lower the number or percentage the safer it is for the Note Buyer.
When a Note Buyer thinks that acquiring a note may be risky one potential solution is to make a lower offer that decreases the ITV. A lowered ITV results in more protective equity for the Note Buyer.
An ITV-based buying example
Consider a house valued at $100,000 that secures a $95,000 note. If the Payor in this situation had poor credit or a history of missing payments this would be considered a risky situation. Since there is only $5,000 in equity any Note Buyer would want a mitigating factor to offset the risk involved in
this purchase.
A logical way to improve this deal from the buyer’s perspective is to make a discounted offer. If a buyer offers only $60,000, the ITV would be 60 percent, giving him 40 percent of protective equity. That $40,000 of protective equity could help her to make a profit, even in a foreclosure situation. If the buyer incurs extra costs when foreclosing and reselling the house, the $40,000 of protective equity should more than cover the
extra expenses.
Note Buyers always have to look after their own interests. Consequently, notes with little equity and a poor payment history are likely to see deeper discounts in order to create protective equity for the buyer. This protective equity will help ensure that Note Buyers can recoup their funds if Payor default leads to foreclosure.
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Friday, March 27, 2009
Wednesday, March 25, 2009
Four most important factors when evaluating a mortgage note value!
When liquidating a note, it’s important to get the biggest lump sum of cash possible. To do that you must understand the four most important factors in determining that value. The four criteria are equity, the Payor’s credit score, the number of payments made, and the note payment history.
Equity is created in three ways:
1. When a down payment is made
2. As monthly payments are made
3. As the property appreciates
Generally speaking, Note Buyers look for at least 20-percent equity in the property. This minimum level of equity serves to help protect their investment.
Many Note Buyers will consider the Payor’s credit score closely because it can help predict the note’s potential for foreclosure. Credit scores are indicative of performance with past and current debts, so it makes sense to assume that a Payor who has been responsible in consistently paying back other debts will be a good note Payor as well.
With seller-financed deals most Payors will not have stellar credit, but most buyers still prefer Payor credit scores above 575.
A note’s “seasoning” describes the number of payments that have been made overall. The more payments that have been made, the more money the Payor has invested in the property; therefore, default is less likely. Most Note Buyers look for 12 or more completed payments, but exceptions are made for notes with a large amount of equity or a Payor with a high credit score.
The note payment history takes any late payments into consideration. Understandably, most buyers prefer a consistent on-time payment history. Perfection isn’t required or expected – one isolated occurrence of a missed payment a few years ago won’t necessarily dissuade a potential Note Buyer. Sufficient equity also serves to counterbalance a history of occasional slow payment.
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Mortgage Notes
Equity is created in three ways:
1. When a down payment is made
2. As monthly payments are made
3. As the property appreciates
Generally speaking, Note Buyers look for at least 20-percent equity in the property. This minimum level of equity serves to help protect their investment.
Many Note Buyers will consider the Payor’s credit score closely because it can help predict the note’s potential for foreclosure. Credit scores are indicative of performance with past and current debts, so it makes sense to assume that a Payor who has been responsible in consistently paying back other debts will be a good note Payor as well.
With seller-financed deals most Payors will not have stellar credit, but most buyers still prefer Payor credit scores above 575.
A note’s “seasoning” describes the number of payments that have been made overall. The more payments that have been made, the more money the Payor has invested in the property; therefore, default is less likely. Most Note Buyers look for 12 or more completed payments, but exceptions are made for notes with a large amount of equity or a Payor with a high credit score.
The note payment history takes any late payments into consideration. Understandably, most buyers prefer a consistent on-time payment history. Perfection isn’t required or expected – one isolated occurrence of a missed payment a few years ago won’t necessarily dissuade a potential Note Buyer. Sufficient equity also serves to counterbalance a history of occasional slow payment.
email us for more information
Mortgage Notes
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