Mortgage Notes

3 Reasons Real Estate Notes are Purchased at a Discount

Note sellers are able to sell future payments on their real estate note at a discount for a lump sum of cash. This is referred to as discounted note investing. The discount applied to each note will vary depending on several factors.

If you have ever wondered why notes are purchased at a discount and not face value, this blog post will explain why. Here are the three reasons real estate notes are purchased at a discount:

Compensate for Risk

The discount protects or compensates the note buyer from the natural risk associated with holding a note. Cash is safe, guaranteed, flexible, and hassle-free. A note carries risk including potential late payments, risk of default, possible bankruptcy, or the hassles and expense of a foreclosure and resale.

Time is Money

Time erodes the value of money. If you had a dollar and I had 4 quarters, it would be fair to exchange, right? Now what if you gave me a dollar today, and I gave you 4 quarters in 10 years. Would that be fair? No! The difference between these two scenarios is time.

Notes are Non-Standard

Most owner-finance notes are very non-standard compared to bank issued mortgages. Often times they do have a formal appraisal and there is minimal documentation. These “non-standard” characteristics make it a non-salable loan on Wall Street at the higher prices of a Fannie Mae-type loan. The discount reflects the higher risk of the non-conforming owner-finance mortgage.

Every single note buyer, like ‘The Annuity Company” , offers a discount on the remaining note balance. It would be tough for a note seller to get around this. Fortunately, the overall marketplace for the note industry is competitive and fair. Just like a basket of groceries may vary somewhat between the corner market and the large retailer, a general price range is established by the market itself. The note buying market is no exception.

Cash offers may vary slightly from each note buyer. It never hurts to get a quote to find out what your real estate note is worth in today’s marketing. C

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