Selling a property with a note can be a great way to get market value for your property, after all you are operating as the bank to the homeowner and therefore “lending” your money for their property purchase. Quite often note holders want to sell their notes for an immediate payoff but are not sure of what criteria a potential note buyer will use to judge their note value. It is important to know these items as you have a valuable, marketable asset and you want to know how to get maximum value for that asset. Below is a list of factors you need to consider when you take your note to market:
The Borrower – It seems to always start with more information on the person you lent money to. Are they a good candidate to get a traditional bank loan in the future? Are they a good credit risk going forward? What is their employment status, tax returns, do they have bankruptcies? Be prepared to provide a prospective note buyer this information to help in their decision making process
Note Seasoning – All this means is the history of the note payments since its origination. The longer the note has a good paying history the better the selling price you can get on the note. A young note (less than 6 months old) will be scrutinized more and be subject to a lower selling price than a note that has been held for 2 years and has a great payment track record. The longer the track record, the lower the risk for the note buyer, the higher premium they will pay for your note.
Interest Rate on the Note – The higher the interest rate (without violating state law) the more valuable the note is to a note buyer. A high interest rate gives a prospective note buyer several profit increasing strategies to try in an effort to increase their returns and shorter the time frame for the mortgage for the borrower.
Debt to Equity Ratio – Last but not lease is the debt to equity ratio. A 3rd party appraisal of the property at the time of your sale that supports the sales price that you and the borrower arrived at will strengthen the value of your note. A note buyer wants to know that if they buy the note and the borrower stops paying, they are covered in asset value. If they need to resell the property on contract the property will support pricing in excess of their purchase price and allow for a nice profit on their investment.
Knowing what a note buyer will ask for before they are interested in your note is important for you. You will arrive at a purchase price with the note buyer faster than if you have to go back and get the information for the first time, and you will be prepared to get best pricing for your note.
Photo Courtesy: Alan Cleaver
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Well said Kevin. Credit, equity and rate of return are what it is all about! Toilets and tenants are for the birds…