BiggerPockets

They would certainly not sell it for $215K. Its not worth that. They might indeed sell it at $95K, or even a bigger discount. Under some circumstances, they might be able to sell it for a premium.

Bonds are just loans, and the math works the same for both.

In your example, the face value of the note is $100K and its yield is 6%. If a buyer wanted a 6% yield, they would pay face value. They would receive the stream of payments totaling $215K over 30 years, which is the 6% yield.

If the buyer wanted, say, 8% yeild, they would need to buy at a discount. The payments ($599.55) and term (30 years) are fixed. This buyer wants a higher yeild, 8%, so the value is lower. That's a PV (present value) calculation, using the payment, term, and the desired yeild. That gives a value of $81,708.

Now, maybe a different buyer only wants a yield of 4%. Repeat that calculation with a yeild of 4% and you get $125,582.

Bonds work exactly like this. They have a face value and a fixed interest rate. They trade based on today's interest rate. So, if today's rate is lower than the rate on the bond, you have to pay a premium to get the higher yeild. If today's rate is lower, you buy at a discount.

In your example, the guy who was selling his owner carry note would certainly sell at a discount. 7% is just over current rates. A buyer might want, say, a 10% yield. So, they would pay a pretty steep discount. If the seller managed to make his note at, say, 12%, then he might come closer to face value, or even a bit of a premium if it was a seasoned note with a good borrower.

Say I can buy and fix up a house for $70K, using my own cash. Now, I sell it with owner financing for $100K, with a 9% note to a decent borrower. I turn around and sell that note to a note buyer who wants 10% yeild. I sell the note for $91,687. That gives me a profit of $21,687.

If I pay, $100K, and have to sell at a discount, I would indeed lose money.

Alternatively, say I write the note at 12%, and sell for $100K after paying $100K. I let the note season for a year, making it worth $99,637 and collecting $12,343. I sell it to an investor who wants 10% yield. He pays me $116,559. So, now my total profit is almost $27K.

I would certainly not sell at market prices and market rates with owner financing. I'd want a premium price and a premium rate. And, a down payment.

There's money to be made by banks in the fees for doing the loan. If a bank can originate a loan, then turn around and sell it at near face value, they get to pocket the fees.

Jon, That is indeed one of the best explainations of how notes are bought, sold and priced. Pricing all depends on what investors are looking for in the current market vs. what they can do with the money elsewhere.
In the good old days lenders could easily originate loans and build in points and then sell off these loans at a premium to other institutions and private investors. These were all thought of as good safe investments and other investors joined in and the demand for these investments went up. Lenders loosened up the underwriting guidelines so that more product could be created to supply investor demand and keep the snowball rolling.
Eventually, well here we are, the loans started failing and homeowners began leaving properties in droves creating a surplus in home inventories and driving down real estate prices. At the same time the original mortgage INVESTORS began running from the secondary mortgage markets in droves leaving 1000's of lenders stuck with loans they have no market for.
As a broker in this market I have had to completely change my business from figuring out where to get the best premiums to, "where do I go to get the least discount for the seller?" We are indeed seeing more lenders come to the table and willingly offer up discounts because they need to free up cash. Also seller financing has become way more popular out of necessity. Now there is more paper on the secondary market than I can remember so the pricing is as low as I have seen. It seems everything is looked at as cents on the dollar vs. yield any more.....