A private mortgage note investor will use what we referred to as mortgage note calculus to determine a purchase offer for your note. By understanding how an investor uses mortgage note calculus, this will aid you when you decide to sell your note. Before we begin it is important for you to understand that a note investor´s offer of purchase will ALWAYS be at a “discount” from the current face value of the mortgage note. Remember, the note investor is in the business of getting a return on their money invested in the purchase of your property note. While each note and its sale are unique, your knowledge as to how a note investor determines a purchase offer will help set your expectations and get you the best offer that meets your short and longer term financial goals.
Mortgage Note Calculus
There are various options available to selling a private mortgage note. The purchase offer for your particular note will be based on the current evaluation of the property type (e.g., single family home versus commercial) and it´s market value appraisal, the borrower´s credit and payment history, the particular terms and conditions established for the loan payment, the current market interest rates and the expectations of investment return by the buyer (investor). A potential investor will have his/her internal guidelines that are used in making an offer to purchase your private property note.
Scenario For Calculation
Here is a representative example of where you are the note holder receiving monthly payments on a single family home that you provided a seller financed loan. A few options available to you on how you can sell your property note are then illustrated. Don´t worry, the financial calculations will not be too burdensome.
- House Sale Price: $110,000
- Down Payment: $16,500 (15%) # The higher the down payment, the better the note. #
- First Mortgage: $93,500 # Sale Price – Down Payment #
- Note Face Value: $93,500
- Note Interest Rate: 10% # The rate should reflect the market and borrower risk. #
- Note Term: 15 Years (180 Monthly Payments)
- Note Payments Received: 24 (2 Years)
- Note Balloon Payment: $0
- Note Monthly Payment: $1,004.76
- Note Current Balance: $87,533.75 # Initial monthly payments mostly interest. #
- Loan-To-Value: $87,533.75 / $110,000 = 80% # Assumes no change in property value. #
Option 1 – Don´t Sell Your Note
Continue receiving a monthly payment of $1,004.76 for the remainder of the note term, 156 months. You will receive payment of your principal ($93,500) plus a 10% return on your investment.
Option 2 – Full Sale of the Full Note and Cash Out
You will receive a lump sum payment of $79,195.35 from the note buyer (investor). Why is this LESS than your current note balance? Because the note buyer requires a return on his/her investment that reflects the value of the property (now and in the future), risk of receiving continued payments from the note borrower and other factors.
Option 3 – Partial Sale of the Note (Front End) Next 5 Years Payments
You will sell to the note buyer the next five years (60) monthly note payments. Afterwards you will receive the remaining eight years (96) monthly note payments. You will receive a lump sum payment of $45,169.02 from the note buyer (investor). You will then continue receiving a monthly payment of $1,004.76 for the remainder of the note term, 96 months, for a loan balance of $71,366.74. For the life of the note you will receive a total of $116,535.76.
Option 4 – Partial Sale of the Note (1/2 of Each Monthly Payment) For Note Period
You will sell to the note buyer 1/2 of your monthly note payment value ($502.38) for the remaining 13 years (156) monthly payments. You will receive a lump sum payment of $39,599.07 from the note buyer (investor). You will continue to receive a monthly payment of $502.38 for the remainder of the note term, 156 months.
Practicing your “mortgage note calculus” will help you understand the different options and benefits available to you that should be reviewed before reaching a decision on the note sale.
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