What is the typical discount on a straight partial note that is seasoned for 12 month and yielding 13% ?
In your scenario, is the interest rate on the note 13% or the discounted yield to the investor 13%?
Scott, My Houston notes would be $30k-$70k with interest at 9 or 10 and payments for 14-25 years. LTV would never be over 65% because we collect 15% Down Payment. Im just curious what kind of discount I should expect for a 6-11 month seasoned note or size of discount on the straight partial initial payments say payments 12 thru-120? What is the discount on partial payments and what determines that discount?
Discount is generally a matter for negotiation, and depends on the quality of the collateral, note terms, borrower, etc. So there is no standard. If you are trying to hit a yield of 13% and you know the rate of your note, number of payments sold, and payment amount, you can use math to calculate both the principal sold and sell price. I can help with that if that's what you are trying to do.
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.
Partial notes aren't so much about the note as the note holder, is the arrangement on a recourse basis or non recourse, recourse is usually required and the subject note is basically nothing more than collateral. When you take part of a note, the question can be which part, the next 24 payments, the last 5 years worth, half each payment, it depends on how the payment structure is set aside.
Non-recourse means you're taking the note risks, due diligence then becomes more about that note and borrower. This will have a great discount can be an 18+% yield to that buyer.
You also have the issue of who will be the "lead lender" who services that note, if the buyer is taking half, they may well demand servicing rights and another 3 or 4%.
Then, on a recourse basis, you may assign part of a note at the note rate, you guarantee that payment, if there is a default by the borrower, you continue paying, or you can set aside more of the note to compensate for default and foreclosure or you may have a combination of arrangements to hedge any loss.
Someone has to be sitting in first position too, first dollars collected goes to which holder? Are the shared according to interest held?
You can also pledge twice the amount received, you can pledge/assign more than one note, retain servicing and do so with full recourse, this basically is buying the payments with the lowest risk for that buyer. All their eggs are not in one basket in one note but more to a portfolio approach.
I'll write about it more later on.... be flexible, look at the alternatives, negotiate with the investor. Good luck :)
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