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Get the highest price for your note!
| | Monday, September 13, 2004 @ 09:42 AM EDT
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Contributed by: John Michael
John Michael Properties
Read more archived articles about Paper and Mortgage Investing
There are several signs that a note will be worth less to a potential buyer. Before selling your note, examine it for these possible problems. It will help you understand the real value of your note.
- The better the credit rating of the buyers, the more valuable your note.
- A Small Down Payment. If the buyer of your property put very little down they may not be as invested in paying it off. This is also something that will affect the pricing of your note.
- No Title Insurance For The Note. This will be a large concern to a potential note buyer.
- If the principal on the note is MORE than the actual value of the real estate expect to take a big discount when you sell the note. An experienced note buyer wants to have some equity in the property in case the buyer defaults.
- If you are taking back a note there is no legal reason to have an appraisal. But if you intend to SELL the note, any experienced note buyer is going to want to know what the property is worth.
- There is no doubt that a seasoned note, where the buyers have made payments for a year or more, is more valuable than a new one.
- If your mortgage is a second mortgage, it should be a properly recorded mortgage or deed of trust to comply with your local laws. Keep in mind that the second mortgage will have less value than a 2nd mortgage. If you are holding a second mortgage it should contain language to the effect that default on the first mortgage is default on the second. Also that you, as second mortgage holder have the right to check on the payment status of the first.
- For a note to be marketable the total LTV, that is including the first and second mortgage (if any) should be no more than 75% of the actual value of the property. However, if the buyer's credit is good, this 75% could refer to the Investment to Value or ITV. In other words, the amount the note buyer is investing in the note. Thus if the property is worth $100,000 and the buyer has put down a 10% payment and has a $90,000 mortgage, you could get $75,000 (75% of the value) for your note.
- The higher the interest rate, the higher the price you will receive. But be aware of laws concerning Usury and Predatory lending.
- Typically it is hard to sell a note with a short balloon, or a balloon due in just 6-12 months. The note buyer will be concerned that the borrower won't be able to refinance and pay them off. But a loan with a 3 to 5 years balloon is going to be saleable!
The earning power of the decreasing mortgage balance is considerably lower than the earning power of a fixed sum invested at interest. For example, assume that the current balance of the mortgage you are receiving payments on is $25,000, at a 10% interest rate, with ten years of $330.38 monthly payments remaining. The total value to you if you were to receive all ten years of future payments is $39,645.60 (120 months times $330.38). However, if you sold the note for $22,000 and invested that amount in another property the earnings are unlimited.
A mortgage note is only a promise of future payments that may, or may not, appear.
Note: John Michael is the author of many guides that can help you become more successful as an investor. See http://www.thecreativeinvestor.com/ChanPart-JohnMichael.html
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