How much of a discount to expect when selling note?

Question

ex.  $100,000 principal, how much lump sum payment would be typical?

Loc R. · Answer

There are many factors a note buyer takes into account when buying a note.

The key is understanding the difference between the discount and the yield.  This is a common mistake made by both buyers and sellers.

The discount required to get to a certain yield is going to be a function of the (original) terms of the note.  A short-term note will require a smaller discount to get to a yield vs. a longer-term note.

Example:

A $100,000 note at 6% interest amortized fully over 10 years (120 months) results in a $1110.12 payment.

That same note amortized over 30 years results in a $599.55 payment.

To get to a 12% yield, the 10-year note would have to be discounted to $77,381.87.  That's a 22.6% discount.

To get that same 12% on the 30-year note, it would have to be discounted to $58,287.30.  That's a 41.7% discount.

Dion DePaoli · Answer

Loc R. and Bill Gulley nailed it for you.  To speak to the OP though.  You ask a question which is not close to providing sufficient information in order to even come close to dealing with your example.

The only data point you name is the Unpaid Principal Balance (UPB).  There is a mountain of other information needed in order to give you any sort of even general answer.  The note rate, term, amortization, payment history would all at a minimum need to be understood.  Additionally, there is no reference to the real estate securing the note.  If the UPB is $100k and the property is worth $50k that certainly is going to make a big difference.

There is a tendency for newer folks or less experienced folks to leave this data out of the information, whether by purpose or accident.  The more data you can provide in full and accuracy the greater chance you will have of getting a high good execution on the asset.  The more data supplied the more you could 'count on' the actual offer, as it would be subject to due diligence in most cases.  In the end, nothing can be hidden from an experienced note buyer, it all will be uncovered so providing as much of the data upfront with inquires for pricing is a better way to approach the intent.  It all is, what it is, good, bad or ugly.  There is a butt for every seat.

Bill Gulley · Answer

These variations of discounts will largely depend on where you are if you are selling to local buyers or nationally. If you don't have access to or knowledge of your buyer and how to put a good loan package together, you can expect a much deeper discount.

Dale Osborn · Answer

Count on 30-40% discount on the note.

Bill Gulley · Answer

Nothing really typical about it, there are buyers that will take a well documented, originated, verified and processed note with a good borrower and then there are buyers for notes that are in default with some loser. You can bet that on a seller financed note you're looking at 10% at least, but could well be 50% in some cases. If it's secondary market grade, may a 5 or 6% discount on a short term, depending on the yield, which will generally be over 10%.  That's just a loose ball park and it depends on who you are selling to......    Most private notes will probably fall in the 20 to 25% area on the average     due to them being poorly made.....   :)

How much of a discount to expect when selling note?

Most Popular Reply