Do Some Investors Pay Par Pricing When Buying Mortgage Notes?

Recently we received a question in the Finding Cash Flow Notes training course related to “par pricing” or “discount” when buying mortgage notes.

First off, here is the Note Broker Question…

Hello and thank you two for all your help. My question is why would a note investor pay par for a note?

I’ve been speaking with a person who helps their clients use OWC (Owner Will Carry). I was informed they are working with a note investor that is willing to buy a note for par.

I don’t understand why an investor would do that since they aren’t making any return. Do you have any insight into this?

And Now The Note Buyer Answer:

It is not impossible for a note investor to pay par, just very rare.

First off, there are some costs to close the deal (appraisal, title, recording fees, etc). So at the very least there is a discount to cover those expenses.

Let’s say it cost the note buyer $1,500 in closing costs. They are going to at least discount the note $1,500 to help cover those costs.

That said, the only reason an investor would pay par is that they are happy with the face rate of the promissory note as their return.

If they buy a note that has the face rate of 12%, they will earn 12% on their money (minus the closing costs).

Par Pricing Example When Buying Mortgage Notes

For example, let’s say someone has the following note (with an acceptable LTV and ITV):

• 200 payments remaining
• $525.00 monthly payment
• $40,576.92 – Current Balance
• 14% face rate

If an investor purchased the above note for par (100 cents on the dollar) they would pay $40,576.92.

Now, let’s assume the investor had $1,500 in closing cost (that they did not pass on to the seller of the note). The investor’s “real” return would look like this….

• 200 payments remaining
• $525.00 monthly payment
• $42,076.92 – Amount Invested ($40,576.92 Purchase Price + $1,500 Closing Costs)
• 13.33% Rate of Return

So, if an investor were to pay “par” for the 14% note, after paying closing costs, the investor would still realize a yield of over 13%. Not a bad return.

The reason you don’t see this often is threefold:

1. There are very few notes written at a rate private mortgage investors want to earn;
2. If the note pays off right away a note buyer wants to at least recoup their costs since they won’t be able to earn a return over time; and
3. Most sellers will accept some reasonable level of discount or pay costs.

There are many ways to get closer to par pricing that don’t involve a “full purchase.” Front-end partials, split partials, and even staged payouts are several options, but those are topics for another day (or check out the Mastering Partials Module in the Finding Cash Flow Notes Training)!

Additional Articles on Discounting Mortgage Notes

How Partials Reduce Note Discount When Selling Mortgages

Calculating Cash Flow Notes for LTV and ITV

What is the Face Rate of a Note?

What’s Your Discount?

 

How Partials Reduce Note Discount When Selling Mortgages

Is the sticker shock just too much when discounting notes?

It might be time to consider selling just some of the remaining payments.

Note buyers have long used the partial purchase to reduce their exposure or investment risk, but it also has benefits for the seller.

You see the time value of money makes payments due now more valuable than those further out in the future. The partial purchase takes advantage of this by letting the seller cash in the most valuable portion – the more immediate payments. Plus the seller gets to keep the face rate or interest rate on the Promissory note working for them on the portion they hold.

Take a look at how this works by contrasting examples of a full purchase and partial sale. Read more

Buying Mortgage Notes: 7 Tips for Calculating Cash Flow Notes

If you plan on selling or buying mortgage notes the pricing will eventually come down to some important cash flow calculations.  If you get cold chills or high school flash backs thinking about math you can always leave the number crunching to the note buyers. However, I challenge you to get outside your comfort zone and give these exercises a try.

Why? Well knowledge is power and you will be able to know if you are getting a fair (or not so fair) deal when selling mortgage notes. Read more

Calculating Cash Flow Notes and a Contest!

I have written before about how note buyers accelerate payments on cash flow notes. One such strategy was the Double Your Payment/Cut The Interest Rate in Half.

Another method is to simply go for an Early Payment With Incentive.

To this day, the following situation is still my favorite example of this method.

It was late December and we were looking at a small note with a $10,000 balance. The payment was only $132.15 per month with a 10% interest rate and 120 payments left.

The note had been purchased at a discount for $6,000, which made for a 24% anticipated return.

Not bad…but we could do better! Read more

How Note Buyers Can Accelerate Return

Holding or buying mortgage notes and want a quick way to accelerate your return?

Sure, you can’t go back to your payer/buyer and tell them to mail more money or even increase their interest rate.

Matter of fact, you purchased the note “subject to” all the terms and conditions already in place and can’t change a thing…unless the payer wants to change them!

Try this…

Offer the payer to cut the interest rate in half (face rate of the note)

if they double their payment!

Let’s say the original note is: Read more

How Note Buyers Protect Against Rising Interest Rates

I am sure you have heard that rising interest rates have a negative effect on real estate notes and I wanted to take a closer look at why. It is important to understand how rising interest rates affect your current notes and future note investments. Read more

MY FRIEND, THE INTERNET – Real Estate Notes

A friend keeps you from making poor decisions, is there in your times of need, and can be a good source of information. Based on this criteria, I consider the internet to be my friend. Yes, the cold, impersonal, most definitely non-human internet has my back. Best thing is, it can and will be your friend, too. Read more

What is Time Value of Money?

 

We’ve all heard the phrase “Time is Money”. But what does it really mean and why does it matter in the discounted note business?  Here’s the short and simple answer!

Money today is worth more than money tomorrow due to its ability to earn interest.  The Time Value of Money concept puts a price on the amount of time an investor has to wait for an investment to mature.

To illustrate, if someone offered you $50 cash today or Read more

What is Due Diligence?

Before a note investor will pay cash to a seller for future payments, they perform what is called “due diligence”.  This is really just a fancy word for research.  You can simplify the process by being prepared for these common note investor requirements. Read more