Why would someone sell a "perfectly good" seasoned performing note for 60-65 cents on the dollar?

52 Replies

I posed this question on a recent forum post and got this response:

To address your question we have to pause on the idea that you implied of "perfectly good".

Is perfectly good the simple notion of payment history?
Is past performance indicative of future results? (credit)
If performance fails can the remedies be enforced? (compliance)
If the remedies can be enforced is the collateral sufficient to support recovery? (equity/discount)

Great response btw, but my question now is, is this really possible in today's market/climate to buy a seasoned performing note (with equity) for 60-65 cents on the dollar?

From what I've seen it's closer to 90 cents on the dollar. Clearly I'm not looking in the right places.

Try notemls.com

We hold some notes and have considered leverage against them and/or selling them.  Cash is king.  If you win the lottery, do you want the cash now or the payout?  

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@Darren Eady

 So my question was, is it possible to still buy performing notes at 60-65 cents on the dollar when the ones I'm looking at are more like 90 cents. Your notes sell for par. That's going in the wrong direction. Am I missing something?

Because the I would use the discounted cash to create a MUCH LARGER note!

So it is a Win Win situation.

Everyone loves a discount.  This, like all real estate, seems to come down to risk vs return.  If you want a note that is going to perform and you feel your position is nearly guaranteed, then you'll pay par, or even a premium, to buy that note, just like banks do.  If you are buying a non-performing note, then you are going to weigh your costs and risks of foreclosure, costs of foreclosure, etc, and come up with a comfortable discount.  And of course there are also several stages in between these two options where you might get a small discount with some risk.  

You know all this already.  I probably shouldn't have jumped into this conversation to talk about my notes.  Good look to you in finding a performing note at a discount.  I do mean that.  Thanks!

How about this: sometimes life happens and people need the money.

@Julian Buick

With performing notes, focusing on the discount is not the correct approach IMO.  Note buyers are generally looking for a certain investment yield and quality level.  From the sellers perspective, someone offering a 4% rate note should expect to offer a greater discount than a seller offering a 10% rate note of similar quality.  As a buyer, if you are looking for a 12% yield you are going to be able to buy higher quality notes than an investor looking for an 18% yield. 

If you don't know how to calculate yield, here's a blog post which covers the topic along with some other common financial calculations.

My advice is to keep looking at notes and develop your investment criteria along the way.  There's a lot of garbage offered out there but you can find good deals too with time and persistence.

Great article Mike, and good common sense advice. Julian, I think 65 cents/dollar for a seasoned performing note is not realistic, although not impossible if you find a motivated seller. Like Mike stated, determine the yield you want and make your offer based on that combined with characteristics of the note and the underlying asset. Also factor in future value per Mike's blog article.  Unless there were some special circumstances, paying par value for the note will cause general loss as future value depreciates. 


@Richard Dunlop

Humour me (I'm originally from Ireland so I'm allowed to use that spelling). 

You have a note that is worth 100K, you sell it for 60K. Now you are looking to buy another note. How exactly do you buy another note that is MUCH LARGER?

What Mike and Bob said is true. Focus on the yield, not the discount. Think of yield as the interest your money is earning. Do yourself a favor and get a financial calculator too. Everyone has different models they like. I love the HP 12C. You can find good notes at 18%, but they will have different characteristics than notes selling at 12% as has been mentioned. Without over simplifying, a note is a promise to pay. The borrower can stop paying at any time, for any number of reasons. Your ultimate backup should be equity in the collateral (property) which can be recovered if the borrower defaults. That's what matters. And other things of course!


@Joshua Andrews  

@Mike Hartzog

 I started this forum based on a comment from Bill G. on another forum where he suggested that someone "Buy a seller financed note that has seasoning in your own backyard, performing with equity. Many note holders are ready for cash after a couple years. Pay around 60-65 cents on the dollar. Then make an offer to the borrower to refinance it, early pay off = profit, rinse and repeat."

I understand that the discount combined with the rate are what is used to calculate the yield. My response to that was the title of this post.

@Max T.

 Agreed but wouldn't people be lined up around the block to buy this note? I'm talking about in general terms, not specific situations. Obviously there are specific circumstances where people do all kinds of crazy stuff but in general why would people do this? 

People buy and sell for any number of reasons. Not all borrowers will want to refinance, nor are all able. If you buy a note, plan on being comfortable with the borrower just paying as agreed, and if he is able to refinance then great! If not, then you are still happy. Early payoffs are blessings but cannot be counted on, at least from my limited experience.


@Julian Buick

Not for nothing here but if the underlying asset's FMV isn't worth the UPB on the note then I would think a discount would be needed to sell it. But, why sell the note at all if it is performing ... I would do it to mitigate my risk going forward. Greater likelihood that this note would turn bad at some point in the future.

I know this sounds like a textbook answer straight from a Banking 101 course but I can't refute the basic logic of it.

@Mike Hartzog thanks for the link to the blog post.  I'm accustomed to working in Excel and find this much easier to follow than the financial calculators!  I have some studying to do this weekend!

@Ann Howell

I'm with you there.  Excel is my friend.  Financial calculators are good in a pinch though.  I've got the 12E Calc app on my phone which does the trick.  I think it cost about $5.  While we're on the topic, another great piece of software is TValue.  It's the industry standard for amortization schedules.  The excel loan amortization template is fine for straight-line amortization, but you need something like TValue to factor in things balloons, planned skipped payments, interest rate changes, and the like.

@Julian Buick

   easy question

just read the yellow letters that private note holders get from investors.

but the reasons are generally

1. something happened and they need a lump sum of cash

2. kids want to buy house need down payment talk parents into selling note to get cash

3. Kid is in jail need to raise bail and hire lawyer.

4. want to buy something like boat RV CAR and have no credit to do so or would prefer to pay cash.

5. another investment opp came up that is more profitable than the discount.

reasons are endless.

@Julian Buick

What Bill was saying is not as outlandish as it may seem.  Folks who sell their property with owner financing may decide, after receiving payments for a time, that they would like to cash out.  In many cases they simply need to raise some cash to pay taxes or a medical bill and don't really want to sell their note.  Nobody wants to sell their note at a steep discount, but when you need cash you need cash, and there are ways to make getting some cash out more palatable for them. 

Most of the buyers I know who focus on seller finance notes buy a lot of partials.  When a number of payments are purchased from the front of a relatively new loan, the loan balance doesn't change that much over the term of the partial because these early payments are primarily interest and very little principal.  The buyer can demonstrate to the seller that while he is buying at a discount, they are getting a nice chunk of cash now, and when its done they still have most of their current principal remaining on the debt.

Obviously, this type of investing requires marketing directly to private owner finance note holders.  You won't find these on tapes of notes offered by established sellers.  The guys I know who are doing this are looking for yields in the 15-18 percent range. 

Originally posted by @Julian Buick :

@Richard Dunlop

Humour me (I'm originally from Ireland so I'm allowed to use that spelling). 

You have a note that is worth 100K, you sell it for 60K. Now you are looking to buy another note. How exactly do you buy another note that is MUCH LARGER?

I take the $60,000 and buy a house I can sell for $150,000 with $20,000 down creating a new note for $$130,000 and $20,000 cash.  My normal markup is greater than my illustration here. Hope that helps. Scottish in my blood somewhere distant past.

Okay,  LOL.

All these investor making comments and then Max comes along with the blinding flash of the obvious, good job @Max T. , that's thinking out of the box!

Mike hit on it as well in his last post. Jay had some wild throws, but all good.

The difference is....who holds the note? An institutional lender or broker or someone in the business or an individual, non-investor type who took a note to get a deal done?

I'm not suggesting predatory dealing, but who is the more sophisticated seller?

Next, institutional types, broker/dealers have pools of investors, reserves to tap into to conduct business, they are "built to trade" they command they yield offered.

Ma and Pa note holders, sold the farm and carried a note back, they have also been collecting payments, paying their tax guy to send out 1099s, compute tax on the principal, take phone calls if the borrower thinks they might be late one month (a good borrower or they just wait) they know one of the borrowers lost a job, now they are shaking if the place has to be taken with them out of town now. Most seller financed note holders are doing servicing, when they probably shouldn't be, but they try to save a dime.

The difference between an entity and an individual is that the individual is exposed to more life occurrences, death, divorce, incapacitation they become ill, go to a nursing home, go nuts, bankrupt, get sued, they have other financial obligations they must meet, their prize dog needs surgery, as Jay mentioned, the grandchild needs a good attorney for a drug charge. The needs for individuals are endless, institutional types are positioned to avoid many of these personal type matters. An individual going to a nursing home may well be qualifying for state benefits, that means spending down the assets to qualify, you can't pay a nursing home bill on $600 a month! There are also ways for them to save money by selling at the FMV assessed....anyway.

As I mentioned in the other thread, I'm repeating myself again, institutional loans are originated under strict guidelines, not seller financed notes, yes, there are exemptions now to Dodd-Frank which may mean Ma and Pa did the deal. Seller financed notes lack origination and qualifying standards, they are often made with overpriced collateral, servicing records are sloppy, in all, a lack of professional management and due diligence which the note holder takes a big hit on in the discount. 

The discount is not just a yield factoring process, it does produce the yield desired, but what is that based on? Many simply shoot for a yield, a blind shot blindfolded, but the discount represents the risk assumed that places the subject investment in line with similar investment alternatives that carry different levels of risk, it is a risk based analysis. If you're just looking for a 16% return, you're not underwriting your investment.

There are millions of dollars worth of these notes within 40-50 miles of you, so many you can't buy them all, even half of them. About 25% will hold the note, about 20-25% need to sell, the rest will take an offer. 

You can find these notes at the courthouse, or you can learn how to work with other professionals, attorneys, accountants, medical staff, bail bondsmen, funeral homes and others who end up dealing with such investments and they will call you for a solution! I didn't spend much time looking for them, people called me!

Yes they will take a 40% discount, after you explain what they are holding, sometimes more. You might buy with a 15% discount, depends on the note, the history, the documents, the collateral and the seller's motivation.

These private notes  are dealt with one on one. You can also contact a seller tactfully with offers to refi. You can pretty well tell if they can refi before you ever close on the note purchase. I pre-qualified borrowers for a refi and new my risk was about zip before I bought the note!

Want to make money, look up "velocity of money" refi notes and you can buy 3 or 4 times as many with the same dollars, the computed yield will smoke your calculators.

You don't have to buy the whole cake either, buy a slice. If you want bigger juicier notes, look at small business transactions, Ma and Par retired from the motel business, sold the car wash, sold the cafe or the auto garage, it's not just houses. Yes, this takes some business knowledge. 

Nothing wrong with playing with Excel or your calculators, but there is a world of notes beyond institutional notes being dumped or getting into investor groups trading in some closed circuit or bucking brokers for a better deal. Just need to learn note fundamentals, the basics of underwriting, risk assessment, collateral assessments, understanding credit issues and secondary guidelines. Might sound like a lot to learn but it's sure worth it!

Thththat's all folks :) 


@Mike Hartzog sounds complicated. I need to do some more research on partials but those yield values sound appealing.
@Richard Dunlop
There you go again with the slight of hand. Magically creating 90k out of nowhere. You buy a house for 60k that you sell for 150k. I'm assuming you are putting a lot of work into the house to increase the value from 60k to 150k. I doubt that would be free.

@Julian Buick

  consider the market @Richard Dunlop works in.... this can be done there NP... can't pull that off on the west coast or at least in the major metro areas...

But can be done all day long in many of the rust belt bigger cities and Detroit for sure.

@Bill Gulley okay it's all starting to fall into place. Thanks for the response. Now for the final part that I'm trying to figure out. How do you find the notes?  I'm assuming they aren't sold online. Do you have to look up county records? And do a bunch of marketing or something? Are there local note wholesalers that can find the notes for you? Although that sounds like brokering, requiring a licence. 


@Julian Buick undefined

You can pay a college kid to find notes at the courthouse, so much an hour with a minimum of notes found, or per note. Add a bonus for deal found. 

Network with professionals as I mentioned above. 

Wholesaling would be buying a note from some bird dog that contracted to buy from a note holder, links in a chain, avoid them. That's guru junk.

I rarely sent a letter initially, I always called people. Networking will get note holders calling you!

Read carefully above, you'll see who motivated note holders might be, target them first.

I'll see if I can get some blogs out, I usually don't blog, but I can see that my forum posts with gold nuggets are buried under Denver, but they are there. Good luck :)

@Julian Buick

  www.fciexchange.com or something close to that they are a MLS system for notes folks want to sell... fair warning though... extreme due diligence is warrented

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