How do you determine the selling price of a performing note?

16 Replies

What would be a fair value for this note? Original loan amount $106,000, 15 years, 8% interest. Perfect payment history of 31 payments since originated 6/30/13. 3000 square foot home/business located on highway 395 in Red Mountain, California. Zoned res/com. Current balance is $95,489 and has 149 remaining payments.

Christopher, an easy answer --- without using a spreadsheet to enter all the variables and determining the monthly payments and the discounted cash flow --- is $95,489 --- the current balance.  After all that is the amount owed.  The borrower would have to pay that balance to retire the note.

What someone will pay you (assuming that you are the note holder), is another question.

If you are selling the note ... and need the cash, you may have to accept less that the $95,489 balance owed.

I hope this helps

I believe most buyers would want to purchase it at a discount. Original note at 8% for 15 years...with most of the time remaining means that the borrower could drag out payments quite a few years into the future. Where will interest rates be at that time? What about opportunity cost? There are a few note buyers here on the board that can probably give you guidance as to what it might be worth in the market. I am going to watch this thread and see what the pros have to say! Good luck.

Hi @Christopher Kelly  Well, you could also factor in the future value, but to keep it simple, just determine what a fair annualized return would be to a note buyer and price it at that amount. Based on your rate and term, looks like the monthly payment is around $1,013. 

If you were to sell the remaining payments at a 10% yield, then the sale price would be $86,259. The higher the yield, the lower the sale price. Hope this makes sense.

Originally posted by @Christopher Kelly:

What would be a fair value for this note? Original loan amount $106,000, 15 years, 8% interest. Perfect payment history of 31 payments since originated 6/30/13. 3000 square foot home/business located on highway 395 in Red Mountain, California. Zoned res/com. Current balance is $95,489 and has 149 remaining payments.

@Christopher Kelly , the reason the note has to be discounted is because of the time value of money. The $1013 a month you're getting now won't buy the same amount of stuff in 12 years when it's paid down. 

The market will determine what the note is worth and that will vary with each investor. One possibility is to sell a part of the note and retain the back end. 

For instance, if you could sell the next 120 payments for $75,000, the buyer would be getting a rate of 10.52%. You would have 79% of the UPB upfront and then get the final 29 payments, which would bring another $29,377.

@Christopher Kelly You've received a number of very good answers which, collectively, give you the thinking and most of the important economic considerations of note buyers.  

There are two facts that have technically been assumed in providing a number of the answers is that there was a satisfactory LTV at the inception of the note and a lower LTV exists today.

1. The current "as is" value of the property is going to have a great bearing on what someone will pay you.   What is the actual, truly realistic - with all its warts - current value of the property?

2. The current income and financial strength of the obligor.  The on-time payments are certainly excellent but to get an idea that's realistic, what are the facts regarding the obligor's financial situation?

Here is what I got when I ran the numbers in my spreadsheet.  If you sold the note for the following amount/ it would give this gross yield to the buyer (there are items like servicing fees that would effect the net yield)

$90,000 gives the buyer a 9.15% yield

$85,000 gives the buyer a 10.30 yield

$80,000 gives the buyer a 11.55 yield

$75,000 gives the buyer a 12.92 yield

Some of the bigger note buyers I have talked to want the 12-13% yield.   You would probably find private investors that would be happy with smaller yields, but it may be more of a challenge to find a single investor with that large lump sum to invest.

Another thing to consider is the value of the property securing the note.  Many investors don't want to invest more than 75% of the value of the actual property.   In the worst case scenario of a foreclosure, they want room to come out of the deal even at worst. 

So then wouldn't it become easier and easier to sell the note at upb with each passing month assuming the note stays performing,  because the note is getting more and more seasoned, the balance is going down and the property value is hopefully staying the same or going up, and the term is getting shorter and shorter?