If you sold property by offering seller financing, a mortgage note valuation is recommended periodically. Both the economy and the personal goals of the note holder change with time. Consequently, the “value” of the mortgage note is also likely to change: positive, neutral or negative. The mortgage note valuation criteria used is subjective in nature, but offers a perspective from a neutral third-party. Let us look at criteria that we would use in your mortgage note valuation process.
Mortgage Note Valuation – External
1 – What is the current market valuation of the property? Since you provided seller financing, you probably sold your property at a higher price than having to discount the price for the note Borrower. If the market valuation has increased to exceed your mortgage note sale price, we would give this a Positive Ranking. Why? Because the Borrower will be motivated to continue paying off the note because of the increase in property equity. This reduces the potential risk of note default. If the market valuation of the property has decreased from your mortgage note sale price, we would give this a Negative Ranking. No change in the market valuation of the property we give a Neutral Ranking. In an uncertain economy, we place significant importance to avoiding note default.
2 – What is the current market for a traditional bank mortgage loan? With seller financing you are likely earning a higher interest rate versus a traditional bank loan. (Your buyer was not able to qualify for a bank mortgage loan at the time, hence needed your seller financing option.) If the market for refinancing the property is more “flexible” (interest rate, deposit and fees) than when you sold the property, we would give this a Negative Ranking. Why? Because the Borrower has the option to pay off your mortgage note earlier than you had planned for. If there is no change in the market for refinancing as when you sold your property, we would give this a Positive-Neutral Ranking. We place medium importance in an unanticipated change in the mortgage note status due to an early payoff by the borrower.
3 – What is the current status of investor tax legislation? Seller financing provides you a monthly stream of revenue from the note Borrower. You probably structured your promissory note to help minimize the payment of investor capital gains taxes. Possibly you also included a “balloon payment” sometime in the future as a means to “get out” earlier than the note term. If there are changes in governmental tax legislation that will adversely change the tax profile of your mortgage note, we give this a Negative Ranking. Why? Apart from paying more in capital gains taxes, this will reduces the value of your mortgage note (less money going into your pocket, rather than the government´s). If there is no change in tax legislation, we would give this a Positive-Neutral Ranking. We place low importance in changes in tax legislation since you can anticipate the change and consider selling your mortgage note to an investor, before the legislation goes into effect.
4 – What is the current status of the property? The property supporting your mortgage note and the surrounding area likely have changed since it was sold. If the Borrow has maintained the property and the area has not changed (zoning regulations, toxic waste spill, etc.) we give this a Neutral Ranking. If changes have occurred that negatively affect the market value of the property, we give this a Negative Ranking. Why? Same rationale as Number 1. If the property and area have improved, we assign a Positive Ranking. We place medium importance in changes of the property and neighborhood since you can take note of this periodically and consider selling your mortgage note to an investor, before the changes are too public.
5 – What is the current status of the note Borrower? For whatever set of reasons, if the note borrower is unable to maintain the note payments it´s bad for you as the note lender. The Borrower may have lost his/her job, a divorce, a relocation, the neighborhood is going down, whatever. The end result is you will need to either go through the loan default process, with it´s time and expense, or you will need to consider selling your note to an investor. (Note that the note investor will take this into account in the offer that you receive.) We give this a Negative Ranking since this will adversely affect the amount you can get for your loan. However, because your mortgage note is backed by the property, if you can afford the time and expense of going through the default process, you can then start the seller financing process AGAIN. In this instance we assign a Positive -Neutral Ranking. We place high importance in adverse changes to the note borrower, but you as the note holder have various options available to you.
Mortgage Note Valuation – Internal
1 – What is the current status of the note Lender? Since you sold your property, your life has changed, perhaps not in ways that you had anticipated. When you offered seller financing, you structured a promissory note that should have met your future financial goals. However, for whatever reason those financial goals may have changed. If you decide that the mortgage note payment stream does not fit your financial goals, you have the option to sell your note to an investor. The timing of the note sale, whether a Full or Partial note sale, an acceptable discount, capital gain tax implications, etc. will determine how to assign a ranking. In this instance you, the note holder, will need to assign a Ranking based on your personal criteria.
Please call us at (888) 213-3383 to help establish the market value of your mortgage note or Contact Us via Email.