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HOW THE MARKET VALUES
YOUR REAL ESTATE NOTE


The Calculation
While there are different methods used for valuation most investors use the yield method. Simply put, the price they are willing to pay is based on the yield or return they would like to earn on the investment. Yield is determined by two factors: The risk of the note and the market conditions for interest rates at the time.

Once the desired yield is determined it is an easy calculation to determine the price. I am not going to get into a detailed discussion of the time value of money, but the price is simply the present value of all the future payments calculated at the desired yield, i.e., the value of all future payments in todays dollars. For example, the balance on your mortage at any point in time is just the sum of the future monthly payments discounted at the loan interest rate.

The most important lesson here is that the higher the yield required, the lower the price investors are willing to offer. Remember, the easiest way and by far the most accurate way to learn the value of your note is to request a free quote either by calling toll free (800) 480-3928 or by submitting our simple Online Application.

How Is The Current Market For Interest Rates?
The market is still at historically low rates now so the value of real estate notes are relatively high.

What Determines The Risk Of The Note?
The following factors are not all encompassing but represent the major factors an investor will look at to determine the risk associated with your note.
  • The Design & Completness of the Transaction    Is the paperwork in order? Are there escrow accounts for the property taxes and home owner's insurance? Is this an interest only loan? What is the term on the loan? Is there a balloon payment? And most importantly, what is the interest rate on the loan?

  • The Credit of the Borrower   The FICO or credit score has become one of the most important numbers in any person's life. While there is opposition, these scores are even being used to determine eligibility for life insurance, availability of jobs and other uses in addition to the availability and cost of loans. The average FICO score in the USA is 678 so FICO scores below this will mean more risk and higher yield requirements.

    Another indication of the credit risk associated with the buyer will be the payment record. How long has the buyer made timely payments?

  • The Type of Property    The type of property also affects the perceived risk of a note. For example, a single family detached owner occupied home is considered much less risky than a non-owner occupied mobile home and a vacant lot in a developed subdivision with all utilities is considered much less risky than a vacant piece of undeveloped rural land. We can do almost all types of properties including commercial and the expertise we bring from our experience is knowing which types of properties the different investors like and are therefore more likely to provide a high note value--the range of values between investors can be significant.

  • The Position of the Note    Obviously, second liens are much more risky than first liens. For example, no investor will purchase a second lien with a zero down payment unless the note is several years old and the property has increased significantly in value. We can purchase both first and second liens.

  • The Equity in the Property    This is determined by the size of the downpayment initially, but equity can grow over time in a rising real estate market. This factor is more important that one would think because there are two ratios that investors use extensively both in determining risk and even in determining their willingness to purchase.

    The first ratio is the LTV (Loan to Value), e.g., an $80,000 loan on a $100,000 home would be 80%. Many investors do not like to go over 90% and will not bid on more than 95%. There are however, investors that will go up to 100% if the other risk factors are favorable.

    The second ratio is the ITV (Investment to Value), e.g., if an investor pays $72,000 for the $80,000 note in the example above his ITV is 72%. This ratio is also dependent on the size of the loan but no investor is willing to pay a 100% ITV because they have costs to cover (appraisal, title, credit report, etc) and they are now assuming all the risks of non-payment on the loan.
Now Lets Put It All Together
We have learned that the value of your note is a function of the current market yield based on the risk of your note and the higher the yield requirement the lower the value. Also, the interest rate on your note determines the size of the payment and the higher the interest rate the higher the value of the note. The table below calculates a hypothetical loan value given variable loan interest rates and yield requirements.

Please don't try to determine a value for your note from this table. There are just too many variables in each transaction to even begin to guess what yield requirement the investors might desire. The table just gives you an idea of the size of the discount over different assumptions.

 
Percent (%) Discount Calculation
Assumptions:
Minimum Discount $5,000
Amount Borrowed $100,000
Term of Mortgage 30 Years
  Mortgage   Investor Yield Required
  Interest % Payment   8.00 % 9.00 % 10.00 % 11.00 % 12.00 %
  4.00 % $477   65.1% 59.3% 54.4% 50.1% 46.4%
  5.00 % $537   73.2% 66.7% 61.2% 56.4% 52.2%
  6.00 % $600   81.7% 74.5% 68.3% 63.0% 58.3%
  7.00 % $665   90.7% 82.7% 75.8% 69.9% 64.7%
  8.00 % $734   95.0% 91.2% 83.6% 77.0% 71.3%
  EXAMPLE:  An investor would be willing to pay $82,700 for a $100,000, 30 year mortgage with a 7.00% interest rate if he required a 9.00% yield on his money.
 


Once again, the only truly accurate way to learn the value of your note is to request a free quote either by calling toll free (800) 480-3928 or by submitting our simple Online Application.

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