Exactly How Does A Note Purchaser Come Up With What They Will Pay For a Private Mortgage?

For starters let me state the apparent. If you sold a house or business property and are holding the owner financed mortgage note  for the buyer, you have a valuable asset that can be sold. This as any other financial asset has a risk and a value (value of the future monthly income stream ) that you can sell to other individuals or investors. Or if you own a home you need to sell, you can offer owner financing to get top money for the home, sell the home and then you can sell the note you are holding in a simultaneous closing for an instantaneous payoff.

Many note purchasers make the note purchasing process a mystery. And while not every private mortgage buyer has the identical requirements just like a stock mutual fund there are five primary elements that affect the price they will pay for a mortgage private note. I have itemized them below.

These factors are:

1. The buyers equity in the real estate as determined by on its appraised or estimated price or sales price. The larger the equity , the greater the purchase price as there is a smaller amount  risk for the investor.

2. The amount of seasoning on the mortgage note, meaning it's been around a good bit of time. In this instance private mortgage  investors are predominantly looking for a good payment history. These buyers want to see that the mortgage note is being paid and the longer the time period, the better. (Risk)

3. The interest rate on the private mortgage. The greater the rate or spread as compared to a benchmark such as treasuries, the greater the price offered. Private mortgage sellers should be very aware of this factor for their financial asset. If, as many gurus predict we go into a phase of substantial inflation due to all the government spending, the value of their private note could fall significantly. (Time value of money.)

4. The amount of time remaining on the note (or balloon period). While this will have an effect the price, a number of note investors like longer periods than others. (Due to the time value of money)  

5. The quality of the credit of the borrower. Most note buyers have set minimum credit score levels in order to acquire a note. Additionally, these buyers will wish to to assess the buyer's credit report for mortgage history, recent bankruptcies, etc.

6. A private mortgage buyer will take all these factors into account and set a discount rate to discount the future stream of income to arrive at a price.

Mortgage note buyers will usually add a sixth issue, the size of the purchase price  (Risk). The greater the dollar exposure, the less liberal these buyers will be on the buyer's credit, the amount of seasoning, etc.

One last word about seasoning, particularly as it pertains to the sale of a private note through simultaneous closings. Obviously, selling a private mortgage formed from the sale of a residence results in the lowest amount of seasoning for a mortgage note. And while this would drop the price a note buyer is willing to pay, if there is a good down payment or combination of a good down payment and the seller is willing to hold a second mortgage, this type purchase can be a great deal for the property seller. This is due to the property seller 1) Being able to sell the property much more rapidly, 2) Usually getting top dollar for the house and 3) Not having to pay a Realtor's commissions.

So there you have it, private mortgage or mortgage selling exposed. Keep this information in mind if you want to or plan to create and sell a private mortgage to sell your home.