Posted by David Butler on May 17, 2007 at 10:09:43:
There is no such thing as “a typical discount” on a note. Instead, note pricing is reliant on a number of factors ranging from the note itself, to the investors who see it, to the information they actually see.
The first thing a buyer will look at is what type of note it is in terms of the type of collateral that is securing the note. Keep in mind that the term “real estate note” is only one category, and it has many subcategories (e.g. SFR, commercial, land) - and each of these subcategories has their own subcategories (for example, if a land note, is it a prime buildable lot, development ground, vacation property, pasture, etc.?).
Not all investors purchase all notes, and many eliminate notes at the outset, if they are not comfortable with the type of property securing the note. And each of the property types has a place in the “pecking order” of “risk rating”… e.g. SFR notes are typical at the top of the pole, getting the best pricing, with looser credit and down payment requirments. Notes secured by commerical properties are next, with lower pricing structures, tighter credit and down payment requirements. Land is further down the list, with notes secured by manufactured homes in parks down further; and notes secured by business assets offering even lower prices, with stiffer credit and down payment requirements.
Next up… what is the Payor’s credit score? The better the score, the better the price paid for the note. Conversely, the lower the score, the lower the price - or the note may not even be salable at present.
Next up… what was the Payor’s down payment. Note buyers like to see at least 5% down made on SFR (with 10% preferred in most cases). They like to see at least 15% down if commerical notes (with 25% down preferred). They like to see at least 25% down supporting business notes (with 40% down being preferred).
Next up… what is the seasoning/payment history? These two factors are intertwined, and the more GOOD payment history the better. A 48 month old note that shows a history of repeated 60 day or 90 day lates is not very well seasoned, particularly if the Payor has been late again in the past 12 months. A note showing 15 payments always made on time might look better to most investors - unless the older note also shows a lot of equity in the property, and the investor looking at the note doesn’t mind the possibility of foreclosure (many note buyers prefer just getting their payments with minimum hassle).
As to the note itself… they guiding rule here is
“How Many” payments will they receive?;
“How Much?” will they receive per Payment?;
“When” will they receive the payments?
“More sooner” obtains a better price than “less later”, all else being equal.
Finally… are investors who are offered the note seeing good, accurate, and easy-to-understand information about the note; and are they all receiving the same information? Having a couple of bidders who are bidding on the same information is one key to getting the best price for THAT note.
You will find more precise detail in a number of discussions in the Archives here, by using “key” terms such as “note pricing”; “selling notes”; “how are notes priced”; “what’s the discount”; “what’s a typical discount”, and similar phrases.
Here’s a couple that you might find useful, regardless of what type of note you are holding:
“Re: What Is For Sale - EXACTLY?!”
“Re: Start At The Beginning!”
Hope this helps, and Good Hunting!
David P. Butler