Just How Does A Mortgage Note Buyer Come Up With The Value For a Owner Financed Mortgage Note?
For starters let me state the apparent. If you sold a house or commercial real estate and are holding the private mortgage note for the purchaser, you have a precious asset that can be marketed. This as any other asset has a risk and a value (worth of the future stream of income ) that you can sell to other individuals or purchasers. Or if you own a house you need to sell, you can offer owner financing to get top pricing for the home, sell the house and then you can sell the note you are holding in a immediate closing for an instantaneous payoff.
Many mortgage purchasers make the mortgage purchasing process a mystery. And while not every private note buyer has the same requirements just like a stock mutual fund there are 5 key elements that affect the price they will pay for a mortgage mortgage. I have listed these below.
1. The the amount of equity the buyer has in the real estate as determined by on its appraised or estimated value or sales price. The greater the , the greater the purchase as there is a reduced amount of risk for the purchaser.
2. Seasoning on the private mortgage, meaning it’s been around a good while. In this case note investors are principally looking for a good payment history. These buyers want to see that the mortgage note is being offered and the longer the time period, the better. (Risk)
3. The interest rate on the mortgage note. The greater the rate or spread as compared to a benchmark such as treasury bonds, the larger the price offered. Mortgage holders should be very aware of this factor for their financial asset. If, as many experts expect we go into a period of significant inflation due to all the government spending, the value of their private mortgage note could drop significantly so if I wanted to sell my note, I would sell now.
4. The amount of time remaining on the note (or balloon period). While this will have an effect the purchase price, some private note buyers like lengthier time periods than others. (Time value of money)
5. The creditworthiness of the borrower. Most note buyers have set minimum credit score requirements in order to buy a private note. Also, these private investors will want to assess the buyer’s credit report for its history, recent bankruptcies, etc.
Mortgage purchasers will usually add a sixth factor, the size of the purchase price (Risk). The larger the dollar exposure, the less tolerant these buyers will be on credit, the amount of seasoning, etc.
One last thought about seasoning, particularly as it pertains to the sale of a note through synchronized closings. Obviously, if you sell private mortgage created from the sale of your house, this will result in the smallest amount of seasoning for a mortgage note. And while this would lessen the price a note buyer is willing to pay, if there is a good down payment or combination of a good down payment and the home seller is willing to hold a second, this type purchase can be a great deal for the property seller. This is due to the house seller 1) Being able to sell the property much more rapidly, 2) Usually getting top money for the property and 3) Not having to pay a Realtor’s commissions.
So there you have it, private note or mortgage selling exposed. I hope this article was instructive.