Partial Note selling

[Efrain Gallardo]

What is the typical discount on a straight  partial note that is seasoned for 12 month and yielding  13% ?

[Scott Arpan]

Efrain,

If your borrowers are willing to accept a 9 or 10% interest rate, the likely discount rate will be 14-16%. The high loan interest rate indicates the borrowers and/or properties are not very strong.

A partial at a 30 to 50% investment to value would be the most likely scenario. (i.e. if the property was worth $100K, their investment in the partial would initially be capped at $30K to $50K) If the note performs, they would likely buy more payments in the future. Not to say I know what every Houston investor would pay.

Here is a short list of factors that determine an investor’s target yield.

• Property type, use, condition and location
• Buyer's financial strength. Are they in stable long term jobs? Double income family?
• If Dodd Frank compliance is required and properly executed
• Crime rates, amount of investment coming into the neighborhood and other indications it is a desirable place to live and will be in the future.
• If you purchased a distressed house and rehabbed it, can you show evidence all repairs were completed. 12 months of seasoning and a clean borrower interview will go a long way toward alleviating this concern.
• Your ability to prove all payments were made on time. A servicer helps. However, if you are selling the note, servicing may need to transfer which can cost a few hundred dollars.
• Size of payment- the same effort is required to collect and account for a $600 payment as a $300 payment. A higher yield is necessary to compensate for smaller payment streams.
• Minimum discount- Even if your note rate approaches the investor’s yield, they want protection from early payoffs.

Hope this helps.

Scott Arpan