What Strategies Do You Use to Value & Sell Performing Notes?

[Victoria OHare]

Hello Everyone,

I’ve been focusing lately on buying and selling residential mortgage notes, particularly first-position, performing notes. I'm curious to hear how others in this space are valuing and exiting notes.

A few discussion questions:

• What metrics do you weigh most heavily (LTV, payment history, discount rate, etc.)?

• When do you decide to hold a note vs sell it?

• For those who sell, how do you find buyers and structure closing?

Happy to share what I look for as a note buyer too, if that’s helpful for others.

[Don Konipol]

Quote from @Victoria OHare:

Hello Everyone,

I’ve been focusing lately on buying and selling residential mortgage notes, particularly first-position, performing notes. I'm curious to hear how others in this space are valuing and exiting notes.

A few discussion questions:

• What metrics do you weigh most heavily (LTV, payment history, discount rate, etc.)?

• When do you decide to hold a note vs sell it?

• For those who sell, how do you find buyers and structure closing?

Happy to share what I look for as a note buyer too, if that’s helpful for others.

Although my expertise is commercial mortgage notes - I occasionally invest in a residential note. 

The first thing I look at is the ROI - yield to maturity.  So I calculate what my annualized return would be based on the current payments, term of the loan and asking price.  If the yield/return does not meet my minimum requirement I’ll try to determine the probability that the seller will accept an offer at a price that does provide my minimum ROi.

Assuming the above is positive, I will utilize all available information; LTV, property type, specific geographical market, payment history, etc. to determine if the note fits into my acceptable risk parameters.  If it does we’re good to move forward.  If not, I decide if there is a minimum ROI for which I am willing to accept the risk.  

Non performing notes are a little different. I divide those into two parts. First is the notes that with restructuring can be made performing.  Those follow the above criteria, albeit with a much higher minimum ROI.  The other part are those that will result in property ownership.  That’s a whole different set of parameters.