How to value note?

[Tom Burns]

I write lots of paper via self-directed IRA, typically for flips, but I also hold a $50k 2nd on a small commercial property. I am 12 months into 60 month balloon, interest only at 9.6%, $400 per month. 1st position lender is same terms as me and has asked me if I am interested in taking him out. Obviously would like to buy it discounted if I can, but have never bought a note before, no idea if this warrants a discount? Both loans are current, all direct deposit from borrower, property value around $200k.

[Mike Hartzog]

There is no hard and fast rule on this.  Seasoned note buyers will generally have established criteria and are looking for a particular minimum yield, so the offer would discount enough to achieve the target yield, assuming there are no other issues present that would warrant a deeper discount.

The first position note is more valuable than your 2nd with the same terms, so one could make the argument that since you were OK loaning on a second position at those terms, a 1st at the same terms would be a better deal.  On the other hand, the seller clearly wants to sell, so you might pick a yield like 12% and discount to that for your initial offer.