An investor offered to sell me a note he has
Newbury Park, CA · Member since 2015 · 9 posts · 1 vote
Hi BP members,
A real estate investor offered to sell me a note which he has between himself (functions as bank) and a buyer of property. he offered to sell me the note for $45K. here are the details of the deal:
Current balance of the note is $46K with 12 years left to pay off
Int rate is 9% so would receive $815 of P&I and escrow from borrower
The value of the home (according to Zillow) is $70K.
First, what are some of the things I should make sure to consider and evaluate before making a decision on this.
The buying of notes is fairly new to me since I'm more of a buy & hold investor.
Any advice would be greatly appreciated.
Thanks
Hey Thembi,
I'm not sure how you came up with the $815 in principal and interest. In excel I did a payment calculation and got $535.33 a month simply doing =pmt(9%,12, $46,000) and dividing the resulting number by 12.
I made a basic calculation in excel. I'm very finance focused so I focused on IRR in the evaluation. With a $45k purchase price your IRR is 9.44%. A basic sensitivity analysis gave me the following:
If you require the following IRRs, here is the maximum you should pay for the note:
12.5% IRR: $38,800
15% IRR: $34,850
Overall, you should judge the risk of taking on this note and decide how much you need to be compensated for that risk. I would ask why he is wanting to get rid of this note! Does he need the money or is he wary of the property (and be aware, he may not be truthful if he is nervous about the property).
I can share my excel if you would like.
That is a pretty slim discount on the note. You never by a not on full face value. 9% interest isn't bad, but you take on all of the risk. You should get a 10-20% discount on it. If you bought the note at $36k you would be getting 11.25% on you 36k investment. You never pay full price on a note.
Thanks Jeff. Do you factor any or the equity on the home currently or thats just not even taken into he equation. So the fact that the home itself is worth $70K compared to the loan of $45K should not be considered?
Thanks!
Thembi
Hey Thembi,
I'm not sure how you came up with the $815 in principal and interest. In excel I did a payment calculation and got $535.33 a month simply doing =pmt(9%,12, $46,000) and dividing the resulting number by 12.
I made a basic calculation in excel. I'm very finance focused so I focused on IRR in the evaluation. With a $45k purchase price your IRR is 9.44%. A basic sensitivity analysis gave me the following:
If you require the following IRRs, here is the maximum you should pay for the note:
12.5% IRR: $38,800
15% IRR: $34,850
Overall, you should judge the risk of taking on this note and decide how much you need to be compensated for that risk. I would ask why he is wanting to get rid of this note! Does he need the money or is he wary of the property (and be aware, he may not be truthful if he is nervous about the property).
I can share my excel if you would like.
Thanks Jeff. Do you factor any or the equity on the home currently or thats just not even taken into he equation. So the fact that the home itself is worth $70K compared to the loan of $45K should not be considered?
Thanks!
Thembi
Finally in regards to this question, the value is certainly considered. Zillow is not reliable. Ask if there was an appraisal done recently, or do one yourself. A simple sales comp approach will get you an idea if $70k is reasonable. Remember, this is your collateral if the note goes bad. If he defaults tomorrow, are you confident you can sell the property for at least your purchase price of the note?
You can get a free account from @eddie speed from “notes direct” and buy performing notes all day long at a steeper discount. All the documents you need for due diligence are on the website. If you are willing to pay a high price for this note you better get everything you ask for and more. Get the loan servicer documentation to verify pay history, UPB, arrearages, and escrow account (ask for updated credit check to compare to pay history). 2. What is the quality of the paper? Notes created by a licensed mortgage originators are a premium grade note. Notes created off legal zoom are not premium grade. Get and updated O&E to verify title and liens. Get training in notes. Finally notes can be buy-and-hold or fix-and-flip or both thru a partial sell.
Hey Thembi,
I'm not sure how you came up with the $815 in principal and interest. In excel I did a payment calculation and got $535.33 a month simply doing =pmt(9%,12, $46,000) and dividing the resulting number by 12.
I made a basic calculation in excel. I'm very finance focused so I focused on IRR in the evaluation. With a $45k purchase price your IRR is 9.44%. A basic sensitivity analysis gave me the following:
If you require the following IRRs, here is the maximum you should pay for the note:
12.5% IRR: $38,800
15% IRR: $34,850
Overall, you should judge the risk of taking on this note and decide how much you need to be compensated for that risk. I would ask why he is wanting to get rid of this note! Does he need the money or is he wary of the property (and be aware, he may not be truthful if he is nervous about the property).
I can share my excel if you would like.
Hi Charles, I neglected to mention that the payment I quoted of $815 actually also includes escrow. Your points are valid and I will ask about motivation behind selling the note. One thing I did tell him was that his note is too pricy and he asked me to make him an offer so after he answers the ?s I will see if Im interested in making an offer. If you wouldn't mind sharing your excel cal that would be awesome.
Thanks!
Thembi
You can get a free account from @eddie speed from “notes direct” and buy performing notes all day long at a steeper discount. All the documents you need for due diligence are on the website. If you are willing to pay a high price for this note you better get everything you ask for and more. Get the loan servicer documentation to verify pay history, UPB, arrearages, and escrow account (ask for updated credit check to compare to pay history). 2. What is the quality of the paper? Notes created by a licensed mortgage originators are a premium grade note. Notes created off legal zoom are not premium grade. Get and updated O&E to verify title and liens. Get training in notes. Finally notes can be buy-and-hold or fix-and-flip or both thru a partial sell.
Thanks Brady. This note is not premium as it is a "seller finance" type situation that he wants to assign to me. Where can I get training in Notes? is there a reputable organization out there. The note buying is definitely new territory but it seems to make sense as another source of income besides what I'm doing now. Ill also look into notes direct by Eddie.
Thanks!
Thembi
That is a pretty slim discount on the note. You never by a not on full face value. 9% interest isn't bad, but you take on all of the risk. You should get a 10-20% discount on it. If you bought the note at $36k you would be getting 11.25% on you 36k investment. You never pay full price on a note.
Thanks Jeff. Do you factor any or the equity on the home currently or thats just not even taken into he equation. So the fact that the home itself is worth $70K compared to the loan of $45K should not be considered?
Thanks!
Thembi
The equity in the property is your safety net if they default. You can buy the note for any price you wish. I would not do it for what there are offering you. You should be able to do much better.
Hey Thembi,
I'm not sure how you came up with the $815 in principal and interest. In excel I did a payment calculation and got $535.33 a month simply doing =pmt(9%,12, $46,000) and dividing the resulting number by 12.
I made a basic calculation in excel. I'm very finance focused so I focused on IRR in the evaluation. With a $45k purchase price your IRR is 9.44%. A basic sensitivity analysis gave me the following:
If you require the following IRRs, here is the maximum you should pay for the note:
12.5% IRR: $38,800
15% IRR: $34,850
Overall, you should judge the risk of taking on this note and decide how much you need to be compensated for that risk. I would ask why he is wanting to get rid of this note! Does he need the money or is he wary of the property (and be aware, he may not be truthful if he is nervous about the property).
I can share my excel if you would like.
Hi Charles, I neglected to mention that the payment I quoted of $815 actually also includes escrow. Your points are valid and I will ask about motivation behind selling the note. One thing I did tell him was that his note is too pricy and he asked me to make him an offer so after he answers the ?s I will see if Im interested in making an offer. If you wouldn't mind sharing your excel cal that would be awesome.
Thanks!
Thembi
Thembi,
No problem, see attached.
https://drive.google.com/file/d/0B7X-jla3NsTEQnRwc...
Please note, I'm not sure if this valuation is exact, the proper way would probably be to change the payment formula to =pmt(9%/12,12*12,46000) as they are often paid monthly, but to be honest I'm not sure as I have never invested in notes.
Also, keep in mind, if the person with the debt decides to pre-pay, these values will change, but it would positively affect IRR. Make sure you evaluate this person who holds the note, along with the real estate as this is important to guarantee the note will pay as you expect!