How Falling Home Prices Hurt When Selling Mortgages

Try to sell a mortgage note lately?

Chances are the pricing was hit by property value in one of three ways.

Home prices have dropped an average of 21% in the last three years, over 50% in some hard hit areas, and it plays a major role in how much a mortgage buyer will pay for an owner financed note.

Here’s a quick glance at what is happening around the country to home prices:

Median Sales Price for Existing Single Family Homes

2006                        2009                        Change

US                                    221.9                        173.2                        -21.9%

North East                        280.3                        240.7                        -14.1%

Mid West                         164.8                        142.5                        -13.5%

South                                 183.7                        154.6                        -15.8%

West                                  350.5                        224.2                        -36.0%

Source: Data Compiled from National Association of Realtors

So how do falling property values affect the pricing?

Big Reason #1 – Equity

When you go to sell payments on a mortgage, trust deed, or contract the note buyer wants to know today’s value of the property. This helps the investor see how much equity a buyer has in the home.

If the property value went down from the time the buyer purchased it means their equity decreased too. The lower the equity the more likely the buyer will go into foreclosure.

When an investor sees more risk they want more reward. Think of it like this:

More Risk = Greater Yield

Higher Yield= Lower Price

Big Reason #2 – Investment to Value

Note investors set a ceiling on how much they will pay compared to the property value. This investment to value (ITV) and lower home values are taking a big bite out of how much upfront cash an investor is willing to shell out.

Here’s how it works (assuming a 70% ITV and a 20% value drop):

70% ITV to Sales Price Value of $100,000 = $70,000 maximum pay price

70% ITV to Today’s Lower Value of $80,000 = $56,000 maximum pay price

That’s a $14,000 difference!

Big Reason #3 – Partial Offers

Lower investment to value and higher yields are causing many investors to offer a partial purchase of the note rather than a full buyout of all the remaining payments.

The partial purchase puts less upfront cash in the seller’s pocket. It also lets them keep a right to future payments, but it means they share the risk of nonpayment with the investor. In many cases the partial purchase is the only way private mortgage buyers can make an offer to buy cash flow notes in today’s market.

Nobody knows how much further prices will drop or how long it will take to stabilize the economy. Note buyers don’t have a crystal ball so they are playing it safe.

Want to know how you can get the best pricing when selling mortgages, even when the property value is low? Read 21 Insider Secrets You Must Know Before Selling an Owner Financed Note!