Question About A Well-Secured Performing Note Paying 12%?

9 Replies

Hello-

Thank you everyone for making this site such a valuable and informative resource.

I'm involved with a performing note that is currently paying 12% interest.  There is approximately 17 years remaining on the note term.  The note is very well secured by owner occupied real estate.  

My question is as follows: is it reasonable to sell this note at a slight premium (ie. say 5% to 10%) to the unpaid balance due to the higher interest rate and good collateralization?

Thank You!

@David Cruice

Hi David - Sorry for the confusion.  I'm asking if it's reasonable to sell this note at a 5% to 10% premium to the outstanding balance.  For example, if the unpaid balance is $100,000, does it seem reasonable to sell this note for $105,00 to $110,000?  Thank You!

@Chad Moore The issue with selling (or buying) it at a premium is that if the owner refinances the note, the person who bought the note at a premium, i.e. bought it above the UPB, just lost whatever amount they invested above the UPB. Is there a prepayment penalty attached to the note?

Chad, before I start, when I see someone making a loan at 12% interest, it sounds to me they planned to sell the loan at par or very little discount to someone in the industry... big mistake, because industry folks buy at discounts, no matter what the interest rate (at least I do).

Anyhow, here's a quick guideline for you when selling notes:

  1. How do I plan to sell this loan? Premium, Par, or Discount
  2. Who do I have in mind to buy? Active/Industry investor or Passive investor
  3. Does the price make sense? 

The moment you want to sell any loan at a premium, your chances of selling to someone in the industry significantly decreases. By significantly I mean... slim to none.

Industry folks can get their hands on discounted loans fairly easily, so your other option is to sell to a passive investor or someone unfamiliar with the industry.

You mentioned before that the loan has a pre-payment penalty on it, but it isn't over the life of the loan. If the borrower is savvy, they are going to refinance this loan as soon as they can to get out of such a high interest rate. The moment the pre-payment window is done, the investors chances of loss via refinance increase. I would look into selling a partial at a premium if you have your heart stuck on selling at a premium.

Selling a 5-year partial at a premium is a much safer bet in case the loan refinances. You are building room in the backend of the note to cover your investor's entitlement while still making the money you're looking for up front.

If you don't have a passive investor to sell to, then you're going to have to rethink your strategy here.

Sidenote: If this loan is to a consumer at 12% interest, you might have what the CFPB calls a High-Cost Mortgage on your hands, in which, there's a lot more compliance to deal with. You'll have to do your homework on that to see where it falls before you go soliciting this around.

Originally posted by @Chad Moore :

Hello-

Thank you everyone for making this site such a valuable and informative resource.

I'm involved with a performing note that is currently paying 12% interest.  There is approximately 17 years remaining on the note term.  The note is very well secured by owner occupied real estate.  

My question is as follows: is it reasonable to sell this note at a slight premium (ie. say 5% to 10%) to the unpaid balance due to the higher interest rate and good collateralization?

Thank You!

Unless you sell this to a unsuspecting and uneducated investor, your chances are slim to nil, and slim already left town.  

Is this an owner-occupied property, and if so, was this note underwritten by an RMLO?  Unless this note is being held by a non-owner occupied investor, then you may also be faced with ursury exemption limit on the interest rate depending on the state its held.  

And when you say "I'm involved with..." do you actually own the note, or trying to broker on someone's behalf?

To tag on this - make sure it’s not self serviced and serviced by a licensed entity otherwise your note becomes almost worthless as if the borrower disputes and your supposed to be licensed you may lose.