The most common question on a note seller’s mind is “How much is my note worth?” The value of your mortgage note determines how much cash you receive when you sell. Mortgage notes are rarely purchased at face value. You can expect to have a discount applied to your note when you sell. The reason is that money today is worth more than money in the future.
Every note is different, so it’s impossible to give an estimate for how much the discount will be without some property and payor information. However, there are a few factors that help determine how much of a discount you might expect to receive.
1. Default Risk. The perceived risk of your note will strongly determine the value. Default risk is present when the payor of the note stops making payments. Mortgage notes in this category are often referred to as “non-performing.” Some of the signs of default risk from the payor are inconsistent or absent monthly payments, poor credit score or payment history, or lack of steady income.
The usual recourse for default is foreclosure, which is costly and time consuming. The discount applied to your note will be more if the risk, and subsequent time and money, are high.
2. Loan to Value (LTV). The remaining balance of the note, divided by the property value, will give you a percentage for LTV. For example, a property valued at $175,000 with a remaining note balance of $100,000 has a LTV of 57%.
LTV is very important to the note for many reasons. It is a measure of the note’s equity and protects from declining real estate values. A payor with a low LTV (i.e. high equity) will be less likely to stop making payments on the note.
A mortgage note with a high LTV presents an investment risk. The discount on your note may be greater if the LTV is above 70%. However, if your note has a high LTV, but you are in need of cash now, consider doing a partial note sell. This will lower the investment risk and put the most cash in your pocket in the long run.
3. Underwriting. Every note broker is different and has their own set of underwriting guidelines. These guidelines determine which notes they can or cannot purchase, and how much of discount will be applied. For example, ‘The Annuity Company’ underwriting guidelines state that a note must be in 1st position and the payor must have a minimum credit score of 620. However, we do purchase notes outside of these guidelines, but apply a higher discount.
The best way to learn what the discount on your mortgage note is to get a quote. All quotes are free, with no-obligation to sell. They take 24 hours or less to prepare, and will give you valuable insight on your note’s current market value.
To learn more about the factors used to value your note, download our free ebook: 30 Factors That Affect the Value of Your Note.