What Makes a Mortgage Note Attractive to a Buyer

Owner carry-back paper can be created as the result of sale of many different types of real estate and properties and, as a general class, the most attractive owner financed mortgage notes are first mortgages that are created as the result of selling a single family residence.  Duplexes, triplexes, multi-family structures, and even resort properties are also generally looked upon as notes with above average investment opportunities but as a class, are considered just a little less desirable than notes collateralized by single family residences.  Additionally, owner occupied single family dwellings will carry a slightly higher value than those used as income properties. Characteristics and conditions of the note, such as its interest rate and payment structure, the credit history of the payor, even of the stability and health of the local economy also need to be weighed when pricing for personal investment or when selling the note to an institution.  Generally speaking:

  • a fully amortized note is more desirable than one with a balloon payment since there will always be the question as to whether the debtor can actually make the balloon payment when required.
  • seasoned notes (those with a reasonably long and timely payment history) are more valuable than new notes with only one or two months of timely payments
  • notes that were created with large down payments are much more attractive to investors than those with little or no money down. (home purchasers will be much less likely to default and walk away from their equity position.)
  • a senior (first position) note is considered to be worth considerably more than one in junior (second or even third position).
  • a second mortgage that is behind an assumable first mortgage is more desirable than one that is not.

In general, purchasing second mortgages must be done cautiously and investors must be certain that the equity in the residence or property is sizable and will easily collateralize a second position note.

Note Detriments:  What Causes a Larger Discount

When getting a purchase quote on a mortgage note, some may find the price offered less than they expected.  The fact is often that when creating the note to sell a property, many carry-back sellers are simply anxious to sell the property and don’t completely consider the possibility that they are creating a note that might be hard to interest an investor in at a later date.  To be certain there are certain characteristics of a private not that can make it less desirable and may add to their perceived risk of investing and turn off investors  These characteristics include….

  • Low interest rate.   While the interest rate of the note itself may not make the sale difficult, the principal discount required by the buyer to “adjust” the yield of a low interest not for attractiveness may not be palatable to the seller.  Remember, the note investor did not make a profit or benefit in the sale of the home.  And while the seller may have been motivated to offer “low interest” financing to get the property sold, the note buyer is only interested in the income from the note that he or she requires.
  • Extensive number of remaining payments.   Some funding sources are not comfortable with notes having long remaining amortizations with over 15 years with today’s rapidly changing markets.  This is one of the3 reasons for the popularity of “partials”, a transaction in which the buyer doesn’t buy the entire note, but rather just a set number of future payments.
  • Insufficient (or lack of) down payment.   Without equity “at risk”, purchasers are more likely to abandon or simply walk away the residence rather than to work out problems.
  • Raw land / Rural Land as Collateral.  Non-income producing properties provide poor quality collateral.

When selling your notes to buyers that contain “flaws” as mentioned above, be prepared to understand how significant note detriments can result in lower bids from the buyer and why.  Purchasers of notes for their own investment accounts are fully aware that such notes can (and usually are) be discounted heavily.  In investing, safety of principal is always of paramount importance and the discount mortgage note investment business is no different.  They know that by learning to properly evaluate the value of a note, they will  be protecting their investment capital and leave the door open for liquidation to other note investors if necessary.

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