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

Sell Mortgage Note to the Payer? What about Me?!

I will never forget the first time I was asked this question by a potential note seller.

“Should I offer a discount to the payer before I try selling my note?”

I was silent for what seemed like minutes. In reality, it was only a couple of seconds before I replied but during those seconds my mind was racing.

Of course I was thinking…

“If the note holder makes an offer to the payer; I may never get the deal. Matter of fact, the payer will probably even pay the seller more money than I can as the note buyer. This deal is gone.”

On the other hand, better to get it over with than have the payer find out later and sideline the whole note sale.

“Yes” I responded, “It is in both of your best interests to see if that is a viable option first.”

First, here is the mortgage note deal…

• The note balance was around $73,000.
• I was not able to pay more than $63,000*.
• He decided to offer the note payer a payoff of $65,000

*(I have rounded the numbers to make up for both ease and my memory loss ?)

Of course, the reality of the situation is that it is rare the payer will have the ability to pay off the private mortgage – even at a discount.

What happened after that was even more interesting…

The payer declined on paying off the promissory note early. Although they were interested, they were not sure “how” they could come up with the money.

The seller came back to me a couple of days later and said he was ready to proceed with me for the $63,000 purchase price.

Now, a typical note closing will take about 3-4 weeks. It really just depends on how quickly some of the due diligence can be completed (waiting for title, appraisal, etc).

Anyway, we were just about to close (about 5 days away) when the seller called and said that the payer had the money and wanted to payoff the note.

At this point, things could have turned ugly for me…

1. The seller could have pulled out of his deal with me (even though we had a binding contract).
2. He could sell the note to the payer and leave me high and dry.

So what happened on buying the note?

Well, the seller told me, “Fred, we had a deal. If there is something you can do with [payer] after you complete this note buy I would appreciate it.”

I think the seller did right by me because, in the very beginning, I did right by him. Sure, that may not always be the case with every seller, but it was here.

In the end, I allowed the payer to payoff the note at a discount right after buying the note. I received one monthly payment and accepted $65,000.

I probably could have brokered the deal and made a few more dollars, but it was important to do the right thing. It may sound old-fashioned, but I really do think things like that come around in the long run. Call it “Note Karma.”

Do you have your own Note Karma story? Share in the comments below!

Will I Have to Sell My Note at a Discount?

The most common question among note sellers is also the one that most new note brokers hope never to hear.

Although I cover numerous ways and specific scripts for answering this question in the Finding Cash Flow Notes Training, I want to address it here from a 30,000-foot level.

When dealing with the note discount question, remember three important things…

1. “Discount” is not a bad word.

Hey, in a perfect world the seller would get 100 cents on the dollars, the note buyer would make a 15% return, and the note broker would make a couple thousand dollars for putting the two together.

But all is not “perfect.” The note was probably created because something was “less than perfect” in the first place.

Maybe it was the buyer’s credit or the condition of the property. Whatever the case, the note was probably not created under “ideal” conditions. The note broker’s job is to find a way to make it work and minimize the discount to the seller.

2. You don’t make the note buying rules.

Like I mentioned above, there are a whole lot of variables that go into the discount of a note being resold. It is important that you do not put yourself in an adversarial position with the note seller.

Even if you are buying the note with your own money, you need to be on the seller’s side. You are looking for a win-win scenario. As trite as that sounds, it really will get your more deals.

That is not to suggest you put more money on the table if they deal will not warrant it. Just create a deal that is fair for both parties and you can sleep well at night.

3. The note discount is not negotiable

Some people make some mistakes in thinking that this is a negotiable item – it really isn’t. The focus should be on the amount of money the seller will receive – not what they won’t get.

I like to refer to the offer as the “fair market value” of the note. In the end, people just want to be treated fairly – and that is just good business.

So the note discount does not need to be a taboo subject. It is the elephant in the room that should be addressed head one. The less you are shocked by it, the less the seller will be.

Let’s Be Brutally Honest About Real Estate Notes

There is a difference between being honest and being brutally honest. For example, if I ask my wife if my new sweatshirt makes my gut look big, an honest answer might be “Kinda”. A brutally honest answer would be “No, your gut makes your gut look big.”

As someone who has taken literally thousands of phone calls from note holders, I’ve always been honest, but I’ve never been brutally honest, until today. 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’s Your Discount?

How do you answer a note seller when they ask, “How much will you pay for my note?” The simplest answer to “What’s Your Discount?” would be “It depends!”  But what you say next is very important.

Here’s how we like to answer the seller’s first pricing question.

“How much we pay really depends on your note. Each transaction is unique so we look to 5 key factors for pricing.  These include the type of property, down payment or equity, the buyer’s credit, how long the buyer has been paying you, and the terms of your note like interest and payment amount.

An average note will demand 80 to 95 cents on the dollar depending on these factors. If you have a few minutes we can go over the details of your deal.  This way we can provide the accurate fair market value of your note rather than just a ballpark estimate.”

We then take the time to ask them questions about their transaction to gather enough information to complete the intake form or quote request worksheet.  If possible, we also obtain a copy of the note, mortgage, and settlement statement.  We can then provide an accurate quote subject to standard due diligence.

However you decide to answer the discount question, be sure you address the seller’s real underlying question, which is “Will you treat me fairly?”

Avoid Three Costly Mistakes!

Would you rather have $97,000 to sell your $100,000 note or only $80,000?  The difference usually comes down to the big three. Here’s the three biggest mistakes note sellers make and how to avoid flushing money down the drain. Read more

Moneymaking Opportunities with Notes!

Whether a seller, investor, or note broker, there are many opportunities to make money with owner financed or seller carry back notes.  There is a lucrative secondary market for seller financed notes also known as the paper business. Here are a few of the most common ways people make money in the note business.

Maximize Selling Profits

A seller often takes back financing for a buyer to appeal to a larger group of buyers and maximize the sale price. A property seller may also elect to take back a portion of the sale price for long-term interest income.  Why should the banks make all the money?

Did you realize that a bank earns back almost 2.5 times the loan amount on an average $100,000 loan at 7.5% that runs for a full term of 30 years? The payment would be $699.21 based on a 360 month amortization which means the buyer will pay back over $251,715.60 after 30 years on the $100,000 loan.  All due to the power of interest!

Referral Fees

A note broker or note consultant earns a referral fee by acting as a financial middleman between a note seller and a note investor.  A note broker markets to note holders offering to help them liquidate their note payments for cash today.  The note broker then connects the note seller with a note investor, earning a fee at closing.  This fee can range from hundreds to several thousands of dollars depending on the size of the note and their relationship with the investor.    

Interest Income

Investors purchase notes for the interest income.  First an investor can earn the interest rate or face rate charged on the note.  An investor can further increase their return by buying the note at a discount.  For example if a note has a balance of $25,000 at 8% interest the investor can offer less than $25,000 to purchase the note for a return of 10% or more.  The greater the discount the more the return is increased!

Rather than holding for long-term interest income, an investor might also purchase a note at a discount and then resell at a later date for a profit.  This is often accomplished by combining several notes together in a group or portfolio selling at a higher price to a larger bulk investor.

Learn More About The Note Business

If you would like to learn more about being an investor or note broker you will also enjoy the following:

Learn the Note Business in 60 Seconds? – OK, you can’t really learn the cash flow note business in just 60 seconds, but this “speed round” of 11 questions will certainly get you started.

5 Myths About the Cash Flow Notes Business – I want to have a very candid conversation about working in the cash flow notes business. Just what it is, how you may be part of it, and some common myths and facts.

How Can I Find Cash Flow Notes – Knowing how to find cash flow notes is the most important skill note brokers can learn. It can also be the most difficult.

Finding Cash Flow Notes Training Videos – Watch this series of free training videos including 5 Ways to Find Cash Flow Notes.

What is a Note Discount?

This is usually the first question on everyone’s list. “Discount”

is essentially the difference between how much is currently owed on the note versus how much the investor is willing to pay for it. Read more