What Impacts Real Estate Note Pricing the Most?

Question

From your experience, which factor has the biggest impact on pricing—LTV, borrower profile, payment history, or interest rate?

Jean G. · Answer

We acquire only non performing loans and as far as those are concerned, I would agree with @Doug Smith. LTV is the most important factor we look at, along with quality/desirability of the collateral (which will determine how easy it will be to dispose of in a down market). Next we would look at the accrued interest and legal balance that we are "inheriting", and whether there is enough spread there to pay close to principal, and finally the foreclosure timelines of the state (which dictate how long it might take to get to resolution), as well as various factors that could influence the likelyhood of a BK and its outcome (for example does the property generate income that would allow the borrower to easily make lender protection payments).

Doug Smith · Answer

Even back during the last crash when I was handling special assets (bad loans) for a bank, payment history is going to determine whether it's performing or non-performing, so I think you have to start there. Beyond that, it's like Performing and NPLs are entirely different underwrites. If payment history determines which route you take, then the importance of those other 3 items also diverges. If you're looking at a Performing Loan, then Ability (part of borrower profile) would be key. If it's an NPL, then I would say LTV/ARV is most important. Pricing is then simply a matter of backing into a number based on factors like note rate and desired yield...kinda like pricing a bond (for performing) or ARV, Current Collateral Value, Time to recoup the asset (deed theory or lien theory states), Required rehab, desired yield, closing/realtor costs, etc (for NPLs). That's my take anyway.