How Do Mortgage Note Buyers Calculate The Price For A Note?

First let us state the obvious. If you sold a piece of property and are holding the mortgage for the buyer of the property, you have a valuable, marketable asset. This asset has a risk and a value (worth of 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.

Many private mortgage note 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.

They are:

1. The amount of equity 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 appraisal. Also, 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. Seasoning on the note, meaning it has been around a while. In this instance 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. (Risk)

3. The interest rate on the note. The higher the rate or spread as compared to a benchmark such as treasuries, the higher the price offered. 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 time left on the note (or balloon period). While this will effect the price, some note buyers like longer periods than others. (Time value of money)

5. The creditworthiness of the borrower. 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.

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.

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

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