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!

About Tracy Z

Tracy combines her knowledge of cash flow notes with the power of marketing online to help grow your business! She can be reached at 1-888-999-7905 or at Exposure One Marketing.


  1. Dan Freeman says

    What is happening with the HUD Rule making that will eliminate seller financing?

    • Hello Dan,

      The HUD Safe Act is more geared towards regulation rather than elimination of seller financing. This regulation could severely limit easy access to owner financing. It imposes licensing requirements on certain transactions where the seller provides financing to the buyer. This mostly applies to seller-held deals on 1-4 unit residential property wherein the seller doesn’t live in the property at the time of the sale.

      States have until July 31, 2010, to have their loan originators licensed under the SAFE Act criteria, unless they already have them licensed under a different system. If already using a different licensing system, they have until December 31, 2010, to bring them in line with the Act’s requirements.
      Source: HUD Press Release No. 09-231.

      For more details, including updates and excerpts from Act please visit

      Thanks for the comments and we’ll keep you updated on the HUD Safe Act impact.

      Tracy Z. Rewey

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