Thinking “I want to sell my note”… what are the critical factors determining its value?
Let’s discuss what gives your mortgage note the most value. First, few mortgages are exactly alike. They have different balances and different interest rates. One mortgage may be secured by a single-family home while another may be secured by apartments. One mortgage may have payors with perfect credit while another will have more risk because the payors have poor credit. There is no central mortgage trading market that establishes mortgage prices as the stock market acts for stocks. As each mortgage must be measured on its own merits, how do we determine value? Let’s look at seven critical factors.
1. A major factor is the credit history of the borrowers.
The risk of default is greater with people who have had trouble meeting their past financial obligations. Therefore, their mortgages entail more risk and will be worth less than mortgages of payors who have met their past financial commitments and have good credit. Not only will we look at how your borrower has performed on his mortgage obligation to you… but we will also investigate how your he has performed on his other financial obligations. Generally, we do this by looking at your payor’s credit report. So when you want to sell your real estate note, you will receive more money if your borrower has solid history in meeting this/her financial obligations.
2. Seasoned mortgages (have been in place for some time) with good pay history are worth more
as they demonstrate the payors’ commitment to making payments. These seasoned contracts with good payment history are more desirable than new contracts or ones that have had late payments.
3. Mortgage notes are graded based on the type of property securing the mortgage.
The most valuable mortgage is on the payor’s single family home in a good neighborhood. Even if a payor has good credit, a financial hardship such as loss of job, illness or injury can occur. If he doesn’t have enough income to pay all bills, his house payment will be the last payment not to be paid since the payor must live somewhere.
But not making the payment on an investment property, land or commercial property has much less effect on his lifestyle. Therefore, a contract on the payor’s home has less risk and will be worth more money than contracts on investor properties, commercial properties or land.
So be aware that when you are thinking “I want to sell my note”, the type of property securing that note will be a major factor in determining value.
4. First mortgages are worth more than second mortgages
because in default, the holder of the second mortgage will lose his investment if he doesn’t completely pay off the first mortgage or make the payments on the first. The second mortgage holder may have to come up with a large amount of money to protect his investment, which can be expensive and may not be prudent.
5. Generally, a mortgage note with a higher interest rate will be worth more money
Assume we are looking at two contracts, each for $25,000, paid off over 20 years. One has an interest rate of 7% and payments of $193.82. The interest rate of the other is 10% with payments of $241.26. As an investor, would you rather receive $193.82 or $241.26 per month? You see that the contract with the larger monthly payment (higher interest rate) is more valuable.
6. A real estate note with a shorter payback period is worth more.
An investor is interested in getting his money back in as short a period as possible. So, mortgages paid off in shorter periods of time are worth more than those paid off in longer periods of time. But, balloon mortgages (ones with a large final payment) may present problems. Will the payor be able to pay off the balloon when due? The note buyer may renegotiate the mortgage for you, eliminating the balloon, to eliminate this risk.
7. The more equity that the payors have, the more desirable that mortgage note becomes.
The more money the payor has at risk, the more likely that in the event of a financial hardship, he will find a way to protect his equity. His financial problem then is much less likely to become the note holder’s problem through default and foreclosure. So if your borrower has a strong equity position the stronger your position will be when you want to sell your real estate note.
So you have made the decision that “I want to sell my note” now, make sure that you deal with a note buyer that you can trust. The note buyers of American Funding Group have been buying real estate notes for over 30 years. Check out what other note holders have said about about dealing with American Funding Group.
If you want a fast and fair offer on purchasing your real estate note, now… please fill out the form on this page. Or, you may call us at 772-232-2383 and we will help you in any way that we can.
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