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Determining the value of a mortgage note

Determining the value of a mortgage note

In this article, we are going to talk about the ways to define the value of a certain mortgage note. If you are buy and sell notes, you’d want to learn how an investor would decide the price of the asset.

Before reading on, it’s definitely worth having a good understanding of what is a mortgage note, so you know what it entails.
When doing so, there are many factors that must be considered when putting a price on a mortgage note. First of all, we must check whether it can be sold at all.

How to determine whether a mortgage note can be sold or not?

  1. Down Payment

First, the down payment determines whether the loan can be transferred. The more money a note seller can collect as a down payment, the more he will sell it for when it comes to the liquidation of the property.

    If the borrower has only 5% down payment or lower, this won’t be a high offer for the property seller. To see any higher bids, one must consider at least 10% down to receive a full offer. However, really big offers happen with a down payment between 20 & 30% of the property buyer.

  1. A credit of Borrower or Property Buyer

    The main idea is that the higher the credit of the property’s buyer is, the larger amount of money you’ll take from the mortgage note once you sell it.

    Moreover, the greater the credit score is, the offer is higher and it’s easier to sell. Of course, having a stellar credit can be a daunting task in recent days. For greater chances of selling the property, you’d need a credit score of at least 580.

III. Recourse vs Non-recourse

    When selling a property to a corporate entity or non-profit organization, you must get an officially written personal guarantee by the individual who heads the entity.

    Having no recourse (personal guarantee) can lead to a loss of thousands of dollars. Most investors pay much less for non-recourse properties due to the larger risk involved in such bargains.

    Furthermore, you must ensure that the guarantor has an appropriate credit score, or else the personal guarantee won’t serve its purposes.

Determining the value of a mortgage note

    There’s a variety of factors involved in the price calculation of a mortgage note. It is important to note that these factors can’t be referred to each note. Calculating the price of a property isn’t a one-size-fits-all approach as there are numerous variables involved.

  1. Investor Yield

    A factor that varies greatly between the different investors. The investor’s yield determines the cost of capital and risk.

    In most cases, the cost of capital for most private investors ranges between six and eight per cent. This cost will be significantly lower if you sell the property to a bank. Of course, some investors might be a bit greedier and ask for up to 15%.

    So, it is recommended to receive multiple offers from different investors to find the most affordable one.

  1. Interest Rate

    It is important to note that private note sellers are not financial institutions and they need to make up for the cost of capital, which means that the yield might be slightly higher.

    They do not have the risk-tolerance such as major banking entities and they can’t make the same offer. If the interest rate exceeds the average for your country, then the investors will have no interest in buying the mortgage note.

  1. Amortization & Paying back

    The last factors that determine the value are the amortization and the payback period. The longer it takes to pay back, the less your property will sell for.

    In most cases, individuals who invest their time and money tend to monetize their investment in the first five to fifteen years. So, if you are looking to sell, then you wouldn’t want a thirty years payback period.